* Key government target, sees tax hike to pay for reform
* Softer approach seen in voluntary contributions scheme
PRAGUE, Feb 16 (Reuters) - Ruling parties in the Czech
Republic, working to defuse the fiscal time bomb set by an
ageing population, will agree reforms to the country's pension
system within days, Prime Minister Petr Necas said on Wednesday.
Offsetting rising pension costs is one of the centre-right
cabinet's priorities and the way the talks pan out will be
closely watched by investors and rating agencies looking to
possibly upgrade the country's debt.
Up for debate is a plan to divert some of the compulsory
social insurance payments, now going straight from working
people's salaries to current pensioners, into pension funds,
offsetting the extra cost to the state with higher sales taxes.
"I expect that we should reach an agreement within days, one
and a half weeks at most," Necas told a news conference.
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For FACTBOX on planned reforms, click on []
For FACTBOX on political risks, click on []
For ANALYSIS on political situation, click on []
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The Czech Republic, rated 'A' by Standard and Poor's and
'A1' by Moody's, has weathered the financial crisis better than
many of its European peers thanks to a healthy banking sector,
but its finances need structural reforms to avoid ever-deeper
deficits in the longer run.
The fallout in revenue caused by diverting money to funds,
estimated from 1 to 2 billion euros per year depending on the
final shape of the pension reform, would be covered mainly by
doubling value added tax on a range of goods to 20 percent.
Sources from political parties have said that an agreement
was nearing, and that the coalition was leaning toward making
the savings transfers into funds voluntary rather than
compulsory.
That has become a key demand of Necas's Civic Democrats,
mindful of recent moves by governments in Hungary and Poland to
use pension fund flows to plug holes in their budgets.
One source said an agreement was close on a system under
which those who choose to join the savings scheme would see 3
percentage points of the 28 percent pension tax diverted to the
private funds, with another 3 percent coming from their net
salary.
Meanwhile, a junior coalition partner, the Public Affairs
party, has been pressing for the value added tax on some basic
food items to be kept at 10 percent.
The country of 10.5 million people had a 29.3 billion crown
($1.63 billion) deficit on its pension account last year.
Last year the fiscal deficit outperformed the target of 5.3
percent of gross domestic product, closing 2010 at 4.8 percent.
The finance ministry has said this year's target of 4.6 percent
may also be undershot.
(Reporting by Robert Mueller, writing by Jan Lopatka; Editing
by John Stonestreet)
