The Czech Old Age Security System in 2020

By Tomáš Zajíček, Charles University, Prague

After the collapse of the Austro-Hungarian Monarchy in 1918, the newly formed Czechoslovak Republic partly retained the Austrian pension-related legislation which targeted only certain groups, such as civil servants. Simultaneously, pension and overall social protection coverage were extended to the majority of the population through the adoption of the Social Insurance Act (Act 221/1924 Coll.) in 1924. Since then, the pension system has undergone a couple of reforms, changing the fundaments of its institutional structure. After the end of socialism in 1989 and the subsequent dissolution of Czechoslovakia in 1993, two acts were enacted that created the legal framework for today’s pension system in the Czech Republic. Namely, a public, earnings-related statutory old age pension scheme  was introduced in 1995 by the Pension Insurance Act (Act 155/1995 Coll.), which was later complemented by a voluntary private pension scheme created in 1994 by the Additional Pension Insurance Act (Act 42/1994 Coll.).  Another reform in 2013 introduced a voluntary private scheme where part of the mandatory pension insurance could be directed. The scheme was abolished three years later. As of today, protection against financial risk in old age is organised by a combination of both public and private pension schemes. Mandatory insurance in the statutory old age pension scheme constitutes the ‘standard protection’ in old age in the Czech Republic. Voluntary participation in supplementary private pension schemes provides options for ‘topping up’ public pensions. Despite the high participation rates, the amounts of supplementary benefits provided by private pension schemes are not high enough to significantly replace the income from the statutory old age pension scheme. Owing to the remaining influence of the socialist pension model, public pension benefits remain essential for retirees and still represent the greater part of the pension income after retirement for many individuals. A ‘minimum’ level of protection is guaranteed by the minimum pension of the statutory old age pension scheme. Outside the pension system, general social assistance measures aim at providing a basic subsistence level to destitute individuals.

Standard Protection in Old Age

Standard protection in old age is provided by the statutory old age pension scheme  (Důchodové pojištění). It is a pay-as-you-go (PAYG)-financed scheme in which nearly all of the economically active population is mandatorily insured. Voluntary insurance in the scheme is permitted for some economically inactive persons and other specific groups. Apart from the standard old age pension, specific regulations determine the rights to early pension, the retirement of miners given the hazardous nature of their work, and the provision of a supplement to the old age pension, such as the monthly supplement (of CZK 1,000) for retirees older than age 85. The pension calculation method also sets a minimum statutory pension level which cannot be less than the amount corresponding to 10% of the average monthly salary in the country. The minimum pension follows the qualifying conditions of the pensions of the statutory scheme.

Back in 2013, concerns over future financial deficits of the statutory old age pension scheme led to the establishment of an additional statutory funded pension scheme (Důchodové spoření) as part of standard protection. The scheme was based on individual savings and provided the option for voluntary participation for persons between the age of 18 and 35. The contribution rate was 5% of the assessment base, consisting of 3% of the mandatory pension contributions and an extra 2% added by the participant. The early legislative elections in 2013 have redrawn the political map of the country, thereby leading to the abolishing of this scheme in 2016. Structural pension reform is a sensitive political issue raised with each election but so far system amendments are only limited to parametric improvements.

Top-Ups

Public pensions can be topped up by voluntary participation in supplementary private pension schemes. Theadditional pension insurance scheme with state contributions  (Penzijní připojištění se státním příspěvkem) was the first supplementary private pension scheme introduced in the Czech Republic.¹ Since 1 December 2012, the scheme has been closed for new entrants and has been factually replaced by thesupplementary pension savings scheme  (Doplňkové penzijní spoření) with stricter qualifying conditions and less risk protection on benefits. Participants of the former private scheme have the right to opt out and relocate their accumulated assets to the successor scheme, as simultaneous participation in the two private schemes is not allowed. State incentives, such as state allowances and tax benefits, as well as the possibility of employers to voluntarily make contributions for their employees have made both private pension schemes very popular.

Minimum

The public pension system guarantees a minimum statutory pension level to those individuals who qualify for any pension of the statutory old age pension scheme. Outside of the pension system, persons with insufficient financial means are protected by the assistance in material need  (Pomoc v hmotné nouzi). This general social assistance measure is means-tested and supports those who have insufficient income regardless of whether they are entitled to low old age pension benefits or not. Material need is defined as the lack of income that is considered necessary to ensure basic living requirements. The assistance in material need does not specifically target senior citizens, but addresses other population groups as well.

¹ As the additional pension insurance scheme with state contributions is closed for new entrants, the scheme is not pictured in the Pension Map for the Czech Republic.