Czech pensionsystem : challenges and reform options

The purpose of the paper is to review the structure and performance of the Czech pension system and examine alternative reform options. The paper shows that in the absence of reform the deficits of the Czech pension system may exceed 8 percent of GDP in 2050. To contain these deficits the paper explores two major pay-as-you-go (PAYG) reform options. The first major option is a standard parametric reform that preserves the defined benefit (DB) scheme. The second major option involves parametric reforms combined with a switch to a notional defined contribution (NDC) scheme. The paper shows that the NDC cum parametric reforms would automatically tighten the link between contributions and benefits and be more resilient to unpredicted demographic shocks. However, both the DB and the NDC options would produce a significant reduction in replacement rates, especially for young generations. To avoid an excessive drop in replacement ratios the authorities should make an effort to increase coverage of the third pillar and improve the regulatory framework for third pillar funds. The authorities may also have to consider introducing a second pillar to ensure universal coverage, especially of young workers. Introducing a second pillar will be easier if the PAYG reforms start immediately. This is because an early implementation of the PAYG reforms would produce a significant improvement of the PAYG and offset at least partly the revenue losses arising from the diversion of contributions to the second pillar.