Pension Reform through Voluntary Opt-Out: The Czech Case

The importance of long-term public finance sustainability in the context of current financial crisis is still seen as one of the basic factors of economic stability. Demographic development resulting in higher percentage of people in retirement age versus economically active people is one of the main risks. There is a growing pressure on expenditures of age-related systems. For this reason the pension scheme reforms are major issue in advanced countries. While some countries have chosen strictly regulated approach towards pension reform, some have given its citizens a choice whether to stay in the old system, or whether to switch to a new one. Such a decision is very complex and whenever the choice was implemented, many more workers switched to a new system than was expected. In this paper, the authors present a micro-based simulation model for the Czech Republic that allows them to model the individuals’ switching decision using several economic and behavioral factors within an old (PAYG DB) and new (FDC) systems. It allows them to estimate the proportion of people who would opt-out to a funded pillar. The authors´ results indicate that under the assumption of rationality and long run predictability of most parameters, only a small fraction of population would choose the multi-pillar scheme. However, this conclusion holds only under a full rationality. Once the authors relax this assumption, a wide range of switching strategies become viable. Therefore, the expectations that the switch will be popular cannot be based only on economic factors, but must also incorporate behavioral aspects, such as the risk of aversion.