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High inflation has taught pension systems a lesson. States that were used to giving pensioners a full rate of inflation increase – about half of it in the OECD – have really stepped up their game. Even the Czech one. Between January 2021 and April 2023, the Czech Republic, as well as Slovakia, the Baltics and Hungary, faced double-digit inflation.
Under the pressure of falling prices, spending on pensions increased. In most developed countries it is common for the price increase to be compensated by pensioners through revaluation. They kept retirees in a tough situation, according to a new OECD report.
“In some countries, valorization has not only compensated pensioners for higher costs, but has even overcompensated for them,” says the biennial publication “Pensions at a Glance.”
Pensioners received an increase in their pensions, and in some places price caps or so-called energy checks helped them with high energy prices. But in real terms, pensions fell on average between January 2022 and January 2023. According to the report, in the Czech Republic, Denmark, Estonia and Great Britain the year-on-year increase is even five percent.
The states protected pensioners from inflation
States deal with assessments in their own way. In most countries they are tied to the level of inflation. The higher the inflation, the higher the compensation – and the greater the burden on the state treasury. Some countries also take wage trends into account, and Germany, for example, evaluates pensions based solely on wages.
Everything has its advantages and disadvantages. “Every system works differently in every economic situation. If real wages rise and are only valued based on inflation, the purchasing power of pensioners falls compared to the average. “On the contrary, when real wages fall, as in the last two years, pensioners are, on the contrary, very protected, even the most dependent group,” believes CERGE-EI economist Filip Pertold.
With the cost of revaluations accumulating like a snowball over the years, Petr Fiala’s government last year began changing the extraordinary revaluations that were always activated in times of high inflation. New pensioners temporarily receive a kind of extraordinary subsidy (until the first regular valorization), which, however, is no longer added to the amount of subsequent pensions.
“It is fair that pensioners bear part of the costs”
Appropriate assessments also await changes. Pensions have so far risen at the full rate of inflation and half of real wage growth, but now they will grow more slowly. Inflation is still fully taken into account, but only according to the cost of living index of pensioner households (not according to the costs of all households in the Czech Republic). And the growth in real wages is only counted from a third onwards.
However, the domestic system will continue to protect pensioners from high prices, says economist Filip Pertold, who advises Minister Marian Jureček (KDU-ČSL) on pension reform. “Revaluations are intended to protect the purchasing power of pensioners against inflation at all costs.” And this pillar will remain.”
Other countries have also taken the route of lowering valuations, which the OECD says is understandable. “While too frequent changes can undermine people’s confidence in pension systems, it is justified that pensioners with pensions above a certain income limit should share part of the fiscal effort with the working-age population in exceptional times of economic or financial stress,” it said it The pensions at a glance.
How does our level decrease after we retire?
In short: The replacement rate indicates how much of the previous income is replaced by the pension paid. Southern countries such as Italy, Spain and Greece are very generous and replace three quarters of previous income.
As a rule, however, pensioners in developed countries receive around half of their previous monthly earnings. The Czech Republic’s replacement rate was below the OECD average before the “inflation tsunami”. However, thanks to the favorable valuations of Czech pensioners, incomes have grown faster than the working population itself in the last two years.
“Thanks to inflation and generous valuations, the incomes of pensioners have come closer to the incomes of the working population.” “The average pension has grown to around 50 percent of the gross salary,” says pension expert Filip Pertold.
But that will change with the coming pension reform. Newly arrived retirees receive lower pensions than those who retired last year. The aim of the Jureček reform is to ensure that average new pensions do not grow faster than average wages.
Future generations of Czechs will have it even worse
The growth of new pensions will gradually slow down, around 180 crowns per year over a period of 10 years. Nevertheless, pensions would increase, Jurečka previously assured: “It is an expected assumption that the future recalculated pensions will increase by a little more than a thousand crowns per year in the next ten years,” he claimed.
“Future generations will be worse off than the current generation of pensioners because they have not received high ratings and at the same time will be affected by an adjustment of the newly granted pensions.” Even for new pensioners, the compensation rate will not fall below 40% of the gross salary,” said Pertold.
In Ireland, Estonia and Lithuania, for example, pensioners now receive less than a third of their previous salary. No wonder that statistically one in four pensioners in the Baltics falls into income poverty (which means that they have an income that is less than half of the average wage). For comparison: in the Czech Republic one in 16 to 17 pensioners is affected by income poverty.
When are you retiring?
The retirement age varies greatly between states. However, due to the aging of the population, it will be delayed almost everywhere for new retirees, typically by two years, the report says. The most dramatic increase in the retirement age from 67 to 74 will be in Denmark. In Sweden 65 to 70 years.
The Czech pension reform, which Minister Jurečka wants to complete by the end of the Fialo government’s term of office, also assumes a future postponement of the retirement age. However, the limit is not fixed, but depends on life expectancy. It won’t stop at 65, it will continue to grow. For example, people born after 1981 could only retire after turning 67, according to the reform.
The states are also tightening the rules for early retirement. The Czech Republic also agreed to tighten early pensions last year – Czechs can now apply for these no longer five, but only three years before the standard retirement age.
How long will we enjoy retirement?
In many countries, people tend to retire before they are eligible for a regular pension. Whether for health or caring for loved ones. Statistics from the OECD comparing retirement age with life expectancy show that people spend an average of 23 years in retirement.
Czechs enjoy their pension for a slightly shorter period of time, just over 21 years. Slovaks and Hungarians will spend even less in retirement, while the Japanese, French, Spanish, Swiss and Italians are expected to benefit the longest. In reality, retirement time will increase as people retire earlier than the legal limit. “There is currently discussion about earlier retirement for demanding professions, which will further reduce the retirement age,” notes Pertold.
The possibility of linking retirement to a healthy life expectancy is being discussed in several countries. According to the economist Pertold, it is practically impossible to implement: “Life expectancy in health is not an objectively measured statistic, it is based on a questionnaire survey.”
What can be improved?
In summary, the Czech Republic has built a solid pension system. It’s expensive, but it protects retirees well in times of high prices. Only a minimum of them live in income poverty. The decline in living standards during the transition “from work to retirement” is also not drastic, says Filip Pertold.
“It fulfills the function of protecting against poverty well.” “The average replacement rates for the average earner are at an appropriate level, but for high earners they are significantly lower than in other countries,” said the economist.
Now, according to Pertold, he should move on to the next pillar. “The Czech system is based almost entirely on a state, continuously funded pillar. It is always better for retirees to have income from multiple sources. The first pillar depends heavily on political decision-making, different generations will have different pension conditions.”
The third pillar in the Czech Republic is voluntary saving in pension funds. According to Pertold, this is not enough. “The third pillar is not working as it should. Young people should automatically enter into some kind of savings mechanism. Behavioral economics teaches us that people don’t remember saving until later in life, when they don’t enter it automatically (with the right to leave, of course).
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