The Czech Republic government is planning to introduce a significant reform of pensions to motivate individuals to save more for retirement. In addition to adjusting the indexation of assistance, the government is also planning to adjust the state contribution to pension savings, which will now start with a monthly deposit of CZK 500. Economists suggest that, at least for people in their 40s or younger, pensions are likely to be less generous than they are today, indicating the need for individuals to create savings to cope with the difficult situation in old age.

The current system of pension funds is viewed as being unattractive to the younger generation. Only about half of young people under 35 are saving for their old age, and they prefer to invest in cryptocurrencies or digital NFTs. The government is considering expanding the possibility of saving for old age and offering the younger generation modern and exciting ways of investing, which will balance risk and return reasonably. An individual pension account is one of the instruments being developed by the Treasury. It should also allow investments in shares, bonds, and units, and the tax deduction could be doubled to 48,000 a year compared to now.

In the case of pension savings, the Ministry of Finance has proposed to adjust the amount of state support so that instead of the current CZK 300 per month, it would start at CZK 500. At the same time, the upper limit for entitlement to the allowance would rise from CZK 1,000 to CZK 1,500, and the maximum budget would be CZK 270 instead of the current CZK 230. The government’s National Economic Council (NERV) has recommended that the state tighten conditions for pension savings and remove half or all of the state’s support for lump-sum payouts at retirement.

However, the proposal is not yet submitted to the government, and discussions are underway at the political level on the specific implementation of the legislative process. According to the Ministry of Finance, it is not clear whether the law will go into the legislative process on its own or as part of the consolidation package. Specific measures should be known by the end of March.

Most pension funds lost money last year, which is not helping client interest. At the end of last year, 4.39 million people were saving for retirement in the third pillar of the pension system, down 40,000 year-on-year. This reform is crucial to motivate all people, especially the young generation, to create their savings to cope with the difficult situation in old age, as pensions from the pay-as-you-go system cannot be relied upon to cover the costs of a dignified life. The changes in the third pension pillar are part of a law related to developing the capital market, and debates are currently underway at the political level on the specific implementation of the legislative process.

Article by Prague Forum