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Czech and central European pension reforms

The lower house of the Czech parliament gave final approval on Wednesday to a bill initiating pension reform, needed to cope with rising life expectancy and low birth rate in the central European country.

The bill will now go for a final approval in the upper house, the Senate, where it is expected to sail through easily. The following are key points of the proposal, further planned steps and a summary of pension reforms in other ex-communist countries in central Europe.

*For the time being, the system will remain a “pay-as-you-go” scheme where working-age people pay contributions that are directly paid out to current pensioners.
*The bill will gradually raise the retirement age to 65 for both men and women by 2030. Current legislation adds several months to the retirement age every year with the aim to raise it by 2013 to 63 for men and up to 63 for women, depending on the number of children they have.
*The reform raises the minimum time of paying the social insurance needed to qualify for full pension to 35 years from 25 years. The minimum time of employment will exclude years spent in schools.
*Early retirement will be penalized by larger cuts in pension.

*Phases 2 and 3 are not part of the current legislation. The government plans to adopt them later during its term expiring in 2010, but approval is highly uncertain due to clashes in the ruling coalition and its weak standing in parliament.
*A reserve fund will be set up to finance conversion to a fund-based pension system. The fund will receive money from privatization of state assets.
*Pension insurance collection and pension distribution will be separated from the state budget.
*Government will raise incentives for private savings.

*People will be given the option of a partial “opt-out” from the pay-as-you-go system. Under the opt-out, people would pay lower pension insurance and manage their own savings.


POLAND - Retirement age is 65 for men, 60 for women.
The system was reformed in 1998, changing the financing to combination of pay-as-you-go and compulsory savings. Parts of the pension contribution are split between two or, optionally, three pillars.

HUNGARY - Retirement age is 62 years for both women and men.
A 1997 law added a mandatory private pension fund element to the old pay-as-you-go system. The system has not been reformed since 1997 and is expected to run into significant financing problems by the 2020s. In late 2006 new rules cut the pensions of those, who retire from 2008.

SLOVAKIA - Retirement age is 62 both for men and women.
The leftist government has said it would not raise it, but its euro adoption strategy paper said higher retirement age was likely in the future to help preserve fiscal stability. People can choose to send half of their contributions to private accounts, while still sending the other half to the pay-as-you-go system.

SLOVENIA - Slovenia introduced major pension reform in 2000 according to which the retirement age is gradually increasing each year until 2014, to 63 for men and 61 for women. Analysts say more reforms are needed due to the ageing population.
Slovenia’s pension system is based on compulsory savings but people are encouraged to combine that with additional voluntary savings in order to boost their pensions. (Reuters)