Czech pension system sees record deficit, reform talks are underway

The Czech pension system is highly dependent on economic cycles, making it unsustainable in the long run.

ČTK

Written by ČTK Published on 02.05.2023 15:00:00 (updated on 02.05.2023) Reading time: 2 minutes

The Czech pension insurance system ended the first quarter of 2023 with a CZK 25.7 billion deficit, the worst first-quarter result so far, according to Finance Ministry data.

Pensions were last raised in January and will increase again in June due to inflation. In total, a shortfall of around CZK 80 billion is expected in pension insurance this year. For all of last year, revenues exceeded pension spending by CZK 21.5 billion.

"If the pension insurance system is in deficit, it does not mean that the state does not have the money to pay old-age, disability, and survivors' pensions. However, it must use other sources of funding in the budget to cover the need for higher pension spending," the Finance Ministry said, according to ČTK.

In the first quarter, CZK 147.4 billion was collected in pension insurance. This is roughly CZK 13.1 billion more than a year ago. However, expenditures are almost CZK 29.6 billion higher than in the first quarter of last year and reached CZK 173.1 billion.

Not sustainable in the long run

Economists say the pension system is unsustainable. The government this month plans to present reform proposals, which include earlier retirement for demanding professions, later retirement for others based on life expectancy and years of service, and a more modest increase in pensions. The government has already pushed for a lower increase for the extraordinary June indexation. It would cost the state CZK 15.4 billion this year.

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Pension spending has doubled in the past 15 years. Last year, it approached CZK 600 billion. The increase last year accelerated after extraordinary indexations to catch up with inflation. About 30 percent of state spending will go into pensions this year with almost CZK 690 billion expected to be paid out.

The Finance Ministry says the pension system is heavily dependent on the economic cycle. The pension account was in surplus in 2018–19 as well as in 2004–05 and again in 2007–08. So far, the highest deficits were in the crisis years of 2012 and 2013, at CZK 55 billion per year.

A National Budget Council (NRR) report on the long-term sustainability of public finances says that by the end of the 2050s, the balance of the pension system could reach 4 percent of the gross domestic product (GDP). At current prices, expenditures would exceed revenues from the pension system by more than CZK 250 billion.

At the end of last year, over 2.84 million people were receiving pensions from the Czech Social Security Administration, of whom almost 2.37 million were old-age pensioners. The average old-age pension in January was CZK 19,438.

Another 49,100 retirement pensions were paid by the ministries of Defence, Interior, and Justice, the average amount being several thousand crowns higher. These ministries also provided disability and survivor pensions.

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