#1>> Workshop, Paris, 1 December 2020 OECD Pension Review: Czech Republic http://oe.cd/pensions-cze-2020 ☑»OECD BETTER POLICIES FOR BETTER LIVES#2OECD Pension Review: Czech Republic OECD Reviews of Pension Systems Czech Republic - - Great collaboration with Ministry of Finance, Ministry of Labour and Social Affairs and various stakeholders Covers all components of the pension system This brief presentation has three parts: Public pensions Impacts of ageing on financial sustainability Voluntary funded pension arrangements >>OECD 2#3Overall context for pensions in the Czech Republic . - Fast population ageing – similar pace as OECD average Almost all current retirees benefit today from an earnings-related pension Average income of retirees is low in the Czech Republic, but old-age inequality is low Sharp increase in employment of 50+ since 2000 (before COVID) Employment rates fall sharply after age 60 and 30% of men receive pensions before the statutory retirement age OECD Reviews of Pension Systems Czech Republic >>OECD 3#4>> Public pensions Workshop, Paris, 1 December 2020 OECD Pension Review: Czech Republic, Chapters 1 & 3 Hervé Boulhol and Christian Geppert OECD, Directorate for Employment, Labour and Social Affairs OECD BETTER POLICIES FOR BETTER LIVES#575 73 71 69 67 65 63 61 59 57 55 Denmark The normal retirement age will remain about one year below the OECD average Normal retirement age for men entering the labour market at age 22 with a full career Current Italy Netherlands Estonia Ireland United Kingdom Finland Portugal Iceland Israel Norway United States Germany Australia Belgium France Austria Canada Chile Japan Mexico Source: Figure 1.14 Spain Sweden Switzerland Poland Lithuania Hungary New Zealand - OECD: current Czech Republic Latvia Korea Slovak Republic Greece Luxembourg Slovenia Turkey 5#6The normal retirement age will remain about one year below the OECD average Normal retirement age for men entering the labour market at age 22 with a full career 75 73 71 69 67 65 63 61 59 57 5455 Future ♦ Current Γ -OECD: future I OECD: current Hungary. Lithuania Switzerland ew Zealand in p Chile Japan Canada Netherlands Estonia reland United Kingdom Finland Portugal Iceland srael Norway United States Germany Australia Belgium France Austria Denmark Italy Source: Figure 1.14 Turkey Slovenia Luxembourg. Czech Republic. Latvia Korea Slovak Republic Greece Normal retirement ages are increasing in half of OECD countries, including in the Czech Republic The share of adult lifetime spent in retirement is projected to increase in the Czech Republic Early retirement age will remain at age 60 years while the current OECD average is already 61.2 years OECD Recommendations: - Implement the legislated increase until 2037 Link to gains in life expectancy after that Raise the minimum retirement age and adjust it to life expectancy as well See later and Chapter 2 for more detail and additional measures to improve financial sustainability 6#7Net replacement rates for full-career workers are similar to the OECD average at the average-wage level Future net replacement rate at the average-wage level, % 100 90 80 70 60 50 40 30 20 10 0 Source: Figure 1.16 Ireland (68) Japan (65) Mexico (65) United Kingdom (68) Poland (65) Lithuania (65) Chile (65) Australia (67) Korea (65) New Zealand (65) Switzerland (65) Norway (67) Germany (67) Estonia (71) Canada (65) Greece (62) United States (67) Sweden (65) Latvia (65) Slovenia (62) Israel (67) Czech Republic (65) Note: Future normal retirement age in brackets. The calculations show the pension benefits of a worker who enters the labour market in 2018 at age 22 and retires after a full career. OECD (66.1) Finland (68) Slovak Republic (64) Belgium (67) Iceland (67) Denmark (74) France (66) Netherlands (71) Spain (65) Hungary (65) Portugal (68) Austria (65) Italy (71) Luxembourg (62) Turkey (62) 7#8Strong progressivity in Czech public pensions Future net replacement rate, by earning level, % • 120 100 80 60 60 40 20 20 Poland (65) United Kingdom (68) Source: Figure 1.16 vW 0.5 AvW Japan (65) Chile (65) Switzerland (65) Latvia (65) Canada (65) Germany (67) Sweden (65) Slovenia (62) OECD (66.1) Slovak Republic (64) Denmark (74) United States (67) Czech Republic (65) France (66) Netherlands (71) ◇ 2 AvW Spain (65) Italy (71) Austria (65) Hungary (65) Progressivity level is a normative, political choice Low replacement rates for high earners: low returns on high contributions · Current schedule is the result of complex rules to compute benefits Same level of progressivity can be achieved in a more simplified way Note: Future normal retirement age in brackets. The calculations show the pension benefits of a worker who enters the labour market in 2018 at age 22 and retires after a full career. 8#9. Need to simplify pension calculation rules Complexity arises from the rules to compute the reference wage: sharply non-linear weights granted to lifetime wages are an exception internationally Figure 1.10. Reference wage and effective accrual by average wage over the career Reference A.Reference wage, multiple of the average wage Effective accrual B.Effective yearly accrual wage 2.0 1.6% 1.8 1.4% 1.6 1.2% 1.4 1.0% 1.2 1.0 0.8% 0.8 0.6% 0.6 0.4% 0.4 0.2% 0.2 0.0 L 0.0% T 0.0 00 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 0.0 0.5 1.0 1.5 2.0 Multiples of the average wage 2.5 25 L L 3.0 3.5 4.0 4.5 5.0 Multiples of the average wage Source: Czech Ministry of Labour and Social Affairs and OECD calculations. 9#10. . Need to simplify pension calculation rules Complexity of calculating pension rights arises from the rules to compute the reference wage, which is crucial: sharply non-linear weights granted to lifetime wages are an exception Lack of transparency in understanding entitlements when they are supposed to accrue: whole career is accounted for to compute pension entitlements, but entitlements accrued in a given year depend on the career before and the remaining part of the career This complexity prevents contributors from understanding pension entitlements and anticipating their income in old age It also weakens the management of the system by making it difficult and more uncertain to project pension flows Some non contributed periods generate no entitlements AND lower already accrued and future entitlements (through lowering the reference wage): this implies a double penalty, potentially leading to a large impact of unemployment periods on pensions 10 10#11OECD Recommendations to simplify the benefit formula while maintaining the reference to wages through the whole career Calculate earnings-related entitlements using a constant effective accrual rate across earnings levels (up to a ceiling). Adjust then the basic pension level to achieve redistribution objectives At least, remove the double penalty related to the impact of non-validated periods on pensions • • Each insured individual would know the acquired entitlements in every period, which would be easily calculated Proposals by the Fair Pension Commission in January 2020 (triple the basic pension level and constant effective accrual rate of 0.39%) would greatly simplify and go a long way in mimicking the current pension formula (see Figure 1.30) at retirement There might be some significant impact during retirement due to indexation Alternative: convert pension in CZK at retirement and follow the indexation rule The Commission proposals imply a high level of basic pension and a low level of accruals in international comparison, consistent with maintaining high progressivity With constant spending, progressivity can be increased (reduced) through a higher (lower) basic pension and a lower (higher) constant accrual rate 11#125 10 15 20 20 25 25 Canada Belgium Australia 30 30 35 55 Eligibility: Very high minimum number of years required Minimum years of contributions required for earning-related pension Czech Republic is outlier: 30 years of contributions (or 35 validated years) at statutory retirement age, 15 (20) years five years later Few older people do not reach the threshold today Yet, risk of having to retire very late to access a small pension or to have contributed for nothing is rising Chile Denmark Finland France Iceland Israel Netherlands Source: Figure 1.11 Poland Norway Sweden Switzerland German CD Ireland Japan Korea Luxembourg United States United Kingdom Austria Estonia Greece Latvia Lithuania Portugal Slovak Republic Slovenia Spain Turkey "Italy. Hungary Mexico Czech Republic → No more validation of education periods → Effect of full employment in Czechoslovakia is vanishing - → Labour market risks might have increased (see Chapters 2 and 3 for more details) OECD Recommendation: Drastically reduce the minimum number of contribution years required to be eligible for old-age pension receipt 12#13Basic pension level: No increase with number of contribution years Contributory basic pensions: Numbers of contribution years required to receive the minimum respectively maximum benefit amounts Minimum at Maximum from Minimum number of contribution years to receive a basic pension: High in the Czech Republic Number of contribution years to receive the maximum basic pension: Comparatively low in the Czech Republic (except Estonia) OECD Recommendations: Drastically reduce the minimum number of contribution years required to be eligible for pension receipt Make basic pension proportional to validated period 45 40 40 35 35 30 25 25 20 20 15 10 5 0 Israel United Kingdom Ireland Japan Korea Luxembourg Estonia Lithuania Czech Republic Source: Figure 3.8 and OECD (2019), Pensions at a Glance 2019 - country profiles. Data for United Kingdom refer to the new state pension. The indicated maximum in Switzerland applies to men while women need one year less. 13#1450 50 45 30 30 30 35 55 25 25 20 20 15 10 5 France Basic pension level: No increase with number of contribution years Contributory basic pensions: Numbers of contribution years required to receive the minimum respectively maximum benefit amounts Minimum at Maximum from الس Switzerland Israel United Kingdom Ireland Japan Korea Luxembourg Estonia Lithuania Czech Republic Source: Figure 3.8 and OECD (2019), Pensions at a Glance 2019 - country profiles. Data for United Kingdom refer to the new state pension. The indicated maximum in Switzerland applies to men while women need one year less. - Minimum number of contribution years to receive a basic pension: High in the Czech Republic Number of contribution years to receive the maximum basic pension: Comparatively low in the Czech Republic (except Estonia) OECD Recommendations: Drastically reduce the minimum number of contribution years required to be eligible for pension receipt Make basic pension proportional to validated period -> Example of countries that fully pro-rate their minimum pension: France, Switzerland 14#1560% 50% 40% 30% 20% 10% Policy option: pro-rated basic component in combination with accruals from the first year of contributions Gross pension benefit (in % of average wage) by career length, for average earners at the statutory retirement age 0% 1 2 3 456 7 8 Source: Figure 1.32. Basic (current) - - Earnings related (current) 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 Career length 15#1660% 50% 40% 30% 20% 10% Policy option: pro-rated basic component in combination with accruals from the first year of contributions Gross pension benefit (in % of average wage) by career length, for average earners at the statutory retirement age Basic (pro-rated) Earnings related (proposed) Basic (current) - Earnings related (current) Can maintain similar benefits as those provided by the current system Provides benefits in line with contributions to the system 0% 1 2 3 4 5 6 7 8 Source: Figure 1.32. 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 Career length 16#1760% 50% Policy option: pro-rated basic component in combination with accruals from the first year of contributions Gross pension benefit (in % of average wage) by career length, for average earners at the statutory retirement age Basic (pro-rated) 40% 30% Parameters of the system can be adjusted to a given level of total spending! 20% 10% Earnings related (proposed) Basic (current) - Earnings related (current) 0% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 Career length Can maintain similar benefits as those provided by the current system Provides benefits in line with contributions to the system Parameters can be adjusted to target a given level of total spending Source: Figure 1.32. 17#180 10 115 45 45 40 40 35 35 30 30 25 25 20 20 15 1991 Social assistance level ("living minimum") has declined drastically in relative terms Living minimum is fixed in nominal terms Living minimum (social assistance) Basic and minimum old-age pension (contributory scheme) Minimum wage % of gross average wage Source: Figure 3.13. 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 • It fell in real terms and declined sharply relative to wages It will lose relevance in the future if no change OECD Recommendations: Index the social assistance benefit level to nominal wage growth 18#19>> Assessing the impacts of ageing on the fiscal sustainability of the the Czech pension system OECD Pension Review: Czech Republic, Chapter 2 Falilou Fall, OECD Economics Department ☑»OECD BETTER POLICIES FOR BETTER LIVES#20>> The old-age dependency ratio is increasing 0.7 0.6 0.5 Men, 65+/19-64 Women, 65+/19-64 -Men, SRA+/19-SRA Women, SRA+/19-SRA All SRA+/(19-SRA) .59 0.3 60 0.2 10 0.1 0 1986 1988 1990 1992 1994 1996 1998 2000 0.39 0.4 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 2062 2064 9907 2068 2070 20 20#21A framework to project pension schemes • A cohort model to project . - Old-age pensions - Disability benefits - Survivor pensions Coupled to a macroeconomic framework - GDP projections based on: Labour force demographics • Productivity . Unemployment 24 21#22• • A pension sampling framework A representative sample of individuals - Representative: 2100 weighted individuals for each cohorts, out of which 1000 natives by gender and 45 immigrants by gender, representing people arriving at age 19 to 64 Distribution of characteristics representative of the population through random draws: disability, participation, unemployment, wages, self-employment, and being widowed. Allows taking into account: Education (3 levels) Gender, including number of children Non-linear factors such as thresholds for contributions and entitlements Framework structured by macroeconomic assumptions - - Demographic projections Labour participation Unemployment and productivity assumptions Distribution Distribution of validated contribution periods at statutory retirement age by birth cohort Distribution of wages per year Distribution of the number of children by generation and women - Distribution of pensions 22 22#23>> Projections of pension spending by schemes in percentage of GDP 0% 2% 4% 6% 14% 12% 10% 8% ▬▬▬▬ ▬▬ Old-age Disability D Survivor 2018 2020 T 2022 2024 2026 ▬▬ 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 2062 2064 2066 2068 2070 23 23#24>> Percentage of GDP Comparing with EU projections 2016 2020 2030 2040 2050 2060 2070 EU - Pension spending 8.2 8.1 8.2 9.2 10.8 11.6 10.9 OECD - Pension spending 8.6 8.4 9.6 11.3 11.9 10.8 EU old-age pensions 6.8 6.7 6.8 7.7 9.4 10.2 9.5 OECD old-age pensions 7.2 7.0 8.2 9.6 10.0 8.8 24 24#25>> 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% Policy options Increasing retirement age to 67 from 2030 Spending, retirement age at 67 Spending, baseline retirement age at 65 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 2057 2059 2061 2063 2065 2067 2069 25 25#26>> The pension replacement rate increases with retirement age 49.0% 44.0% 39.0% 34.0% 29.0% 24.0% Baseline, retirement age at 65 Increasing retirement age to 67 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 2051 2052 2053 2054 2055 2056 2057 2058 2059 2060 2061 2062 2063 2064 2065 2066 2067 2068 2069 26 26#27Indexation of pensions with inflation will reduce expenditures 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Full indexation on nominal wages - Baseline (Inflation + 50% real wages) - Inflation only 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 2057 2059 2061 2063 690> 1907 990 27 27#28Comparing policy options Policy options Deficit at peak year (in pp) Impact on employmen Impact on GDP Other effects t Relaxing mandatory +0.2 (in percentage) Marginal (in percentage) Marginal Bridge coverage of "unlucky" workers contribution period Increase effective capital -0.5 -0.8 -1.7 tax rate by 2.2 percentage points. Increase self-employed -0.2 -0.7 -0.8 effective contribution Foreign capital losses are fully taken account, but are likely to be lower in practice, as transfer of production units abroad take time. Increase in fairness, increased tax evasion of self-employed rate by 5 points Increase SRA until 67 -0.7 +3 +3 Productivity losses, actual participation projected Old pensions indexed -0.8 Limited Limited with inflation likely lower than Impact on GDP likely negative but precise estimate would require much more complicated macroeconomic modelling with heterogeneous agents. 28#29>> VOLUNTARY FUNDED PENSION ARRANGEMENTS OECD Pension Review: Czech Republic, Chapter 4 Stéphanie Payet, OECD Directorate for Financial Affairs OECD BETTER POLICIES FOR BETTER LIVES#30Main issues identified Coverage is high for a voluntary system 52% of the 15-64 participate, but <20% for the 20-24 and <40% for the 25-29 Contribution levels are small Average contributions by participants ~2% of national average wage <25% of participants receive employer contributions Investment performance among the lowest in the OECD Conservative investment strategies due to the annual non-negative return guarantee for 74% of participants Retirement benefits are low • • Overall, only 4% of pensioners' income come from the supplementary pension schemes Mostly lump sums payments Pension management companies compete through their distribution network, not on fees 30 30#31Strengthen the role of the funded system in the overall pension system Introduce a new, occupational pension scheme or improve the design of the existing supplementary pension schemes 1. Improve net performance 2. Encourage higher contributions 3. Lengthen contribution periods 4. Extend the take-up of lifelong retirement income products 31 34#32Improve net performance Encourage or nudge participants to switch to participating funds ■ Promote the access to an appropriate default investment strategy, e.g. life-cycle ■ Better align fees charged to participants with the costs incurred by the pension management companies Analyse the cost of investing in different asset classes before increasing the fee cap for alternative funds Apply a regressive scale for management fees to pass on economies of scale to participants as assets under management grow 32#33Encourage higher contributions Redesign some elements of state financial incentives . • Keep current structure but link the state contribution to the contribution rate, or ⚫ Change to a simple matching contribution ■ Set up a mechanism where contributions increase automatically up to a pre-set maximum (easier with occupational plans) Promote employer contributions ■ Provide information about expected benefits from the entire pension system 33 33#34Lengthen contribution periods ■ Increase the minimum savings period ■ Consider introducing automatic enrolment into an occupational pension plan or a participating fund, with appropriate default contribution rates and investment strategies 34 ==#35Extend the take-up of lifelong retirement income products Discourage the full lump sum pay-out option Increase the attractiveness of life annuities through additional product features (e.g. guaranteed period, survivor option, or profit sharing) ▪ Establish clear rules to build appropriate mortality tables including future improvements in mortality and life expectancy, and check that providers of retirement income products apply these rules properly 35#36» OECD Pensions Outlook 2018 OECD Pensions at a Glance 2019 »OECD Contact OECD Reviews of Pension Systems Czech Republic >>> OECD 23 November 2020 OECD Pension Reviews [email protected] [email protected] [email protected] [email protected] http://oe.cd/pensions-cze-2020 http://www.oecd.org/els/public-pensions/ http://www.oecd.org/els/public- pensions/policy-notes-and-reviews.htm »OECD TWITTER: @OECD Social