Mon, May 24, 2010 page9

• Young Czechs reduce reliance on state pension

  • By Jason Hovet / REUTERS
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  Six years ago, Petr Kalal started saving for a retirement that was four decades away to reduce his reliance on a state pension system that many Czechs of his age believe will be bankrupt by the time they finish working.

  The 31-year-old Prague bank clerk is part of a generation worried that today’s politicians will spend away their future by neglecting hard-to-sell structural reforms, such as pensions. Public pension liabilities are set to explode in a couple of decades.

  “People who want to govern in the Czech Republic will promise you anything in the world. They will promise that we will solve pensions, we will raise everything, you don’t have to pay anything,” he said. “We should all learn from the Greek example, that one day your debts will come back to find you.”

  The issue of how or whether to reform systems in place since the fall of communism 21 years ago has split political parties and voters ahead of a May 28 and May 29 general election that may decide how large a bill future generations will have to foot.

  After a decade of procrastination, reforming the pension system is at the heart of how to secure future budgets and keep credit ratings agencies happy.

  Unlike neighbors Slovakia, Poland and Hungary, the Czech government still relies solely on a state system that uses tax receipts from workers to pay pensioners today, rather than supplementing the system with longer-term private accounts.

  Analysts in a Reuters poll listed reform of the one-pillar pension system as a key task for the next government, although the growing likelihood that no strong winner will emerge from the vote increases the risk reform may not get off the ground.

  “From the long-term perspective, the fiscal debt [from pensions] is going to explode if there are no changes to the pension system,” Citibank analyst Jaromir Sindel said.

  Kalal’s contemporaries pay the same amount into social security as their parents, but are set to receive far less in retirement benefits. The pay-as-you-go (PAYG) system’s debts will exceed one year of economic output by 2065, according to projections by a government council on pension reform.

  With the the number of pensioners set to exceed working-age people by 2050, analysts and industry officials say there needs to be a second pillar pushing taxpayers to put money into state or private-run retirement accounts to meet the demands of an aging population and a shrinking workforce.

  “Our current system ... has only one source of financing: the payroll tax. We should start to build up a fully-funded pillar, mainly for the younger generations,” said Jiri Rusnok, an executive adviser and pension director at ING Bank.

  Rusnok is on a new 10-member government council that is set to make recommendations on pension reform next month.

  The simple option, he said, would be to divert 3 percentage points of the 28 percent social security tax into individual accounts. More expensive would be to add a 3 percent taxpayer contribution that would be matched by the state.

  The annual transition cost for the state would be about 0.5 percent to 1 percent of GDP, he said — a tall order at a time when budget deficits have to be slashed.

  With European markets battered this year by the fallout from the Greek debt crisis, fiscal discipline has moved to the top of investors’ worry list and it is a hot Czech campaign topic.

  The leftist Social Democrats, ahead in the polls, oppose a second pillar and want to protect the PAYG system, saying it should be up to citizens to get an individual account.

  Social Democrat voters are on average older, while the right has more support among the young, reflecting their respective policy preferences. The center-right Civic Democrats are for private accounts, as are some smaller right-leaning parties.

  For now, Czech state debt levels are about half the EU average, but falling revenue during the economic downturn exposed years of neglect on public spending, of which pensions accounted for 30 percent last year.

  Czech Deputy Finance Minister Bohdan Hejduk estimated last month that the pension system would run a 35 billion crown (US$1.70 billion) deficit this year because of structural problems and unemployment.

  A STEM agency poll a year ago showed two-thirds of Czechs thought the system needed substantial change or a complete overhaul, while the rest felt no major changes were needed.

  The issue prompted two actors to copy a video from the last US presidential election urging people to persuade their grandparents not to vote for leftist parties.

  The clip has attracted over 630,000 viewers and gives the message: “The left will only make debts and after your grandparents peacefully pass away, we shall have to pay for it until the end of our lives.”

  Czechs have debated pension reform for more than a decade, but lack of political will has meant successive governments failed to introduce a second pillar, instead opting for changes to the PAYG system, such as raising the retirement age.

  The government council debating pensions is a reincarnation of a previous body whose recommendations in 2005 fell on deaf ears because of the start of election campaigning then.

  For Adam, a 34-year-old manager at a pharmaceutical company, it is best to save now, rather than count on the state system.

  “I don’t think [my] state pension will be sufficient to live comfortably on, or maybe even to live on,” he said.

  ADDITIONAL REPORTING BY ROBERT MUELLER
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