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Pension Policy

Similarly as other developed countries also the Czech Republic faces problems with the pension system. Up to now parallel financing of this system is untenable already from the beginning of the next century and its reform has not been yet prepared. All former inclusive the present government were reluctant in its preparation and therefore difficult problems can be expected. The principle of the inter-generational solidarity with a partial solidarity inside generations has to be gradually turn up into the main principle of inside generation solidarity. The pension eligible age, which is still too low, has to increase and parallel financing has to match more and more with fund financing. In the future pension system, the pension guaranteed by the state will lessen its importance in favor of pensions payed from compulsory and voluntary insurance.

Pension systems at the time of accelerated demographic ageing

The age structure of any population is created through a long-standing development of reproduction. It is based on the size of generations born in the past 80-100 years which were gradually reduced by mortality (age-specific mortality rates) and modified by migration. Given the constantly falling mortality an increasing percentage of the original number of new-born children survives until the old age. Due to this, the number of the elderly in population increases (absolute ageing or ageing at the top of the population pyramid). If there is also a falling natality, the generations of new-born babies constantly shrink, due to which the proportion of the elderly in the total population is on a rise (relative ageing or ageing at the population basis). This objective process of demographic ageing results from intensification of reproduction and is further deepened in the course of the second demographic transition due to an accelerated decline in natality.

A smooth, uninterrupted course of demographic ageing only appears in the countries with "normal" or undeformed age structure. If there is irregular age structure, demographic ageing accelerates (if a given age limit is exceeded by strong generations born in a demographic "boom") or, on the contrary, slows down if preceding generations are less populous. As a rule, it is just a short-term change in a general trend, lasting only a few years.

In various populations or in the same population at a different time the ageing population in the "post-productive" age, which includes those above a given age limit (60 or 65 years), makes up a different percentage of the population. This is caused by the character of the earlier established age structure, but mainly by the level of mortality of the medium and higher-age population. An increased or directly high number and proportion of the elderly appears in the populations with populous generations of those born long ago and/or low mortality, in which a high proportion of population reaches old age and after reaching a certain age limit it lives longer (high values of life expectancy). The assessment of demographic ageing or proportion of the elderly and ratio to the number of people living at productive age is naturally linked with the establishment of the age limit at retirement as well as whether and how it is differentiated (in the Czech Republic it is lower for miners and women and it depends on the number of children for the latter).

The adopted old-age pension scheme in various countries usually paid respect to the form of the age structure and anticipating its future changes it established the age when one is eligible for old-age pension and calculated its value (dependence on years of economic activity and income from work). In the initial stage of demographic ageing the numbers of the elderly were only rising rather slowly and their proportion did not swell much either. It was therefore possible to base old-age pension schemes on the principle of parallel financing. Based on the calculation of intensity of economic activity and values of wages individual percentage rates of social insurance were established on a level fully covering, along with similarly established payments from employers, financial sources necessary to pay the pensions. Both rates were established in the Czech Republic with the intention of obtaining a certain surplus, paid to the public budget annually.

This old-age pension scheme was based on the concept of solidarity between generations (generations of economically active in productive age "paid" old-age pensions of their parents and grandparents as well as disability pensions). In the Czech Republic there is also a certain solidarity between the people with high and low incomes (if a high salary exceeds a certain limit only a part of it is included in the calculation of the value of the pension). This leads of course to the equalisation of pensions to the benefit of those who earn less or to the dominance of the social approach over the merit approach. Such an old-age pension scheme respected the average life span after a pension is obtained or payment of a certain bonus if someone was still employed, valid above a certain age limit, and gradually also index-linking of earlier pensions in order to prevent debasement by inflation (in the Czech Republic the index-linking is compulsory if the living costs rise by 10%).

Immediately after the law on pension scheme was passed (No. 155/1995) it was clear that the system can only work before a rapid increase in the number of pensioners, caused by the arrival of populous generations born after 1945 in the retirement age and by a rising life span (a growing number of people reach the retirement age and live longer in it, whereby the payment of pensions is longer as well). Results of demographic forecasts have shown that the parallel system of financing of pensions can only survive until the beginning of the next century in the Czech Republic. In order to postpone the unstoppable breakdown of the system of parallel financing the age when one is eligible for the old-age pension will be raised from 60 to 62 years for men and from the average 55 to 59 years for women until 2006 (there is a tendency to gradually approach the age limit for both sexes).

The growing burden of demographic ageing has no solution but to totally alter the old-age pension scheme. This has either happened or is happening in all advanced European countries, including another postponement of the age at retirement. Discussions have been underway for years and various proposals concerning necessitated changes have been submitted in the Czech Republic, too. The necessity to adopt a new system is apparent, but the proposals differ. It has been confirmed that the future old-age pension insurance will have several components as a combination of parallel financing and fund financing, either voluntary (supplementary pension insurance) or compulsory for economically active people and probably also for employers, which involves the risk of more expensive manpower and the knowledge that this actually implies increased insurance rates. It is taken for granted that the new system will have to have several transition stages because it will refer in a different degree to various generations of people. Undoubtedly, the importance of the "state pension" will gradually decrease as it is paid within a framework of a weakening parallel financing according to the length of employment and age retirement in the next periods, while a growing role will be played by the amount and importance of pensions from the resources created and capitalised from compulsory insurance and possible payments from employers and, in particular, by the amount of pensions based on voluntary supplementary insurance.

A significant role will be played by the calculation of individual components of the pensions to be paid in the future as well as by the state guarantees provided to newly established insurance funds. The principle of inter-generational solidarity will be fully preserved for "veteran pensioners" (this means current pensioners with minimum conditions and efficiency of voluntary supplementary insurance) and in the generations of new pensioners it will be gradually weakened; similarly the redistribution between people with higher or lower working incomes will be reduced. One can expect a gradual increase in the differentiation of pensioners, especially due to various length and amount of voluntary supplementary insurance.

Earlier proposals about a creation of pension funds have proved unrealisable (the indispensable billions could not be obtained even by efficient big privatisation) and there is a consensus on gradually introducing a new, multi-component system. It has a big disadvantage: the costs will be borne by medium generations in the long run (it involves higher insurance rates both for pensions of the elderly as well as for these generations themselves, but also in the case of voluntary supplementary insurance). But there is no alternative to this. Time has been lost by further discussions and lack of courage to implement the system (this goes for all cabinets since 1993). Evidently, another provisional arrangement will be sought in the postponement of the age of economic activity by another 2-3 years immediately after 2006 to slow down the growing number of future pensioners for some years to come.

Demographic ageing and its implications in the sphere of social security cannot be only labelled as a "reverse" of a longer life expectancy. The whole problem also has an "other side" in the form of a long-standing decline in natality and fertility which leads to the gradual shrinking of the productive part of population after a time. The growing need of resources for pensioners is not reflected in any growth in their creation by diminishing numbers of economically active people. It is also a sort of additional tax paid for the lowered number of children in families and society, which will be gradually affecting all generations of adult people.

It has turned out that it will only be possible to provide a thorough solution to the consequences of demographic ageing by curbing the consumption at the time of creation of resources and by transferring the arisen compulsory "savings" to the old age. The alleged savings of populations arisen by the diminishing costs on a lower number of children will backfire in the form of increased costs of medium-aged generations to the benefit of older generations of surviving grandparents and eventually these people themselves. Insufficient respect to the regularities of population development will eventually lead to an enforced economic solution.

In this sense one has to review future conditions of the provision of costly health care to the growing numbers of the elderly, especially given the growing helplessness of the elderly (another anticipated negative impact of a longer life span). Some gloomy forecasts indicate that in the future there may arise the threat of a lack of manpower needed for the care for the ill, helpless and elderly.


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ISSN 1213-8290 Copyright © 1999-2002 Boris Burcin, David Komanek