The first steps to pension reform

The coalition government has announced it will change the way pension growth is calculated, a concrete step toward addressing one of the most pressing economic issues it will face during its tenure.

Labor and Social Affairs Minister Jaromír Drábek of TOP 09 announced July 20 that the government will begin calculating pension payments on the basis of inflation rather than wage growth in 2012. Pension growth will slow considerably from the current allotment of one-third of real wage growth under the new system, saving the state budget 5.5 billion Kč ($280.5 million) annually.

"The hitherto growth of pensions is untenable for the state budget. We cannot reckon with the state securing the increase in pensions for all pensioners also in dependence of real wages' [growth]," Drábek said, the daily Hospodářské noviny reported. "We want to push this step through along with pension reform," he added.

Under the current law, pension payments will rise an average of 390 Kč per month next year as a result of inflation and real wages' growth. According to Drábek's plan, pension payments would rise only 233 Kč per month, a savings of 157 Kč per pensioner each month.

Pension reform experts are tentatively supporting this first step, but anxiously await the form of the government's future plans for pension reform. Vladimír Bezděk, whose committee under the auspices of the Finance Ministry submitted a comprehensive list of recommendations for pension reform in June, told The Prague Post that Drábek's proposal "goes in the same direction as the recommendation of the committee," albeit on a different timeline.

"We proposed price indexation of pension, but implemented gradually over the next 10 years, instead of the sudden change that is part of the recent proposal," he said.

Pension reform has been an active topic of debate for several years, but has become a more pressing issue in recent months, as many hope the new coalition government will prove economically savvy and take active steps to reform the country's outdated pay-as-you-go pension system. In the 2010 budget, pension payouts reached 350 billion Kč, or 9.4 percent of GDP, the largest single expenditure in the budget. The figure is due to rise by almost 20 billion Kč next year.

Stephan Delbos can be reached at
sdelbos@praguepost.com