Despite rejection from the Senate and a lack of presidential endorsement, the Czech Lower House passed the government's main pension reform bill on 11 September 2011. The law enabling the semi-privatization of Czech social security through the introduction of a second pillar to complement the first pillar pay-as-you-go scheme will allow workers to redirect part of their social insurance contributions to individual accounts through an optional but automatic enrolment.

The bill was rejected by the mostly left-leaning Senate on 8 June 2011, just days after the European Commission published recommendations for an older retirement age and the faster implementation of pension reform in the Czech Republic as part of a series of country-specific proposals for member states. The Lower House (Chamber of Deputies) had already approved the changes when the Senate and President refused to endorse the bill. President Václav Klaus wrote that he does not think the State should act as an insurance company and does not approve of the principle by which the amount of one's pension corresponds to one's contributions to the system.

After the senate rejection, the bill returned to the Chamber of Deputies for a second reading where a simple majority was needed to overrule the senate vote and pass the bill into law. With 115 of parliament's 200 seats, Prime Minister Petr Nečas's three-party centre-right coalition overrode the decision and the changes came into force in September.

With a goal of lowering the total amount paid by state and increasing the correlation between pension contributions and benefits perceived, the main facets of the reform include:

- a progressive increase to the retirement age by two months each year, with no prescribed endpoint: those who are 40 years old today will retire at 66; those who are 10 years old today will retire at 71; those born in 2012 will retire at 73;

- a bridging of the gap of the retirement age for men and women by 2041 (women can currently retire from four to seven years earlier than male counterparts);

- a new pillar of the pension system: three percentage points of the 28 per cent social insurance tax that workers currently pay into the public pay-as-you-go system will be diverted into privately administered funds. Workers must supplement this with another 2 per cent of their salaries.

According to KPMG, earnings used to calculate contributions will be linked to the national average wage, with limits rising gradually until 2014. Pensions are likely to increase for people with an income over 36,000 Czech korunas (CZK), and slightly decrease for people with a monthly income of CZK12,500 to CZK36,000, though the Ministry of Labour and Social Affairs assures citizens that this will not affect standards of living.

The new system is expected to launch by 1 January 2013. Citizens aged 35 in 2011 will have to decide if they will join the second pillar by the end of 2012; those currently under age 35 will have to decide by the time they reach 35. The decision will be permanent.

The changes come in the larger context of an austerity campaign launched by the Czech government austerity campaign, including higher taxes and reductions in state payroll and expenditures. The "minor pension reform", as referred to by the government, sparked heavy criticism from lawmakers and protests and strikes, came after a 2010 resolution by the Constitutional Court that ruled that Section 15 of the Pension Insurance Act, which stipulates the calculation of old-age, disability and survivor pensions in an egalitarian manner rather than based on income, were unconstitutional. Criticisms of the pension reform include a lack of clarity on how many people will actually join the new pillar (government estimates half of working population while economists' projections are much lower), the uncertainty around the risk involved in the private fund, and a sentiment that reform was hasty without sufficient social consultation or agreement. Critics worry that changes will most adversely affect those who make less than the average wage of EUR11,500 a year. The costs of those who opt out will be offset by the unification of two separate value added taxes at 17.5 per cent in 2013, pushing up costs for books, staple foods and other items.

The changes are the first attempt at pension reform since fall of communism. Bulgaria, Croatia, Estonia, Hungary, Latvia, Poland and Slovakia have already introduced mandatory pillar pension funds. The Czech government argues that their pension reform differs from that of Hungary's appropriation of pension assets to offset debt or Poland's reduction in funds transferred to private accounts to plug debt. Additionally, the Czech Republic will still offer a guaranteed basic pension, unrelated to the contributor's income.

Source: Cat Contiguglia, “Senate votes down 'small' pension reform: Despite rejection, the package may still likely become law,” 15 June 12011, http://www.praguepost.com/print/9063-senate-votes-down-small-pension-reform.html, “Czech experts not concealing misgivings about pension reform,” CEHIA, 11 September, 2011, http://www.cehia.com.ro/2011/09/11/czech-experts-not-concealing-misgivings-about-pension-reform/, “Czech Republic kicks off pension reform,” EurActiv with Reuters, 14 July 2011, http://www.euractiv.com/socialeurope/czech-republic-kicks-pension-reform-news-506552, “KMPG financial update June 2011 (Czech),” KMPG, June 2011, www.us.kpmg.com/microsite/TNF-Europe/2011/Jul/Czech-july8.pdf, “Information on Pension Reform,” Ministry of Finance of the Czech Republic, http://www.mfcr.cz/cps/rde/xchg/mfcr/xsl/duchodova_reforma_62383.html, Muller, Robert and Jana Mlcochova, “Czech parlt passes pension reform bill in 1st reading”, Reuters, 13 July 2011, http://www.reuters.com/article/2011/07/13/czech-pensions-idUSPRG00507820110713.

Legislation date: 09.2011

Implementation date: 09.2011