PRAGUE, Feb 18 (Reuters) - The Czech ruling coalition agreed
on Thursday an outline of pension reform, the key point of an
agenda aimed at defusing the threat that budget deficits will
rise as the country's population ages.
The plan to strengthen the savings pillar of the pension
system goes in the opposite direction to steps by Hungary, which
renationalised pension fund assets, and Poland, which also plans
to restrict flows to savings accounts to help the budget.
Prime Minister Petr Necas said on Friday the Czech plan
would be budget-neutral, with a value-added tax hike bringing in
about 2.4 billion euros per year, plus dividends covering the
cost of the reform and deficits already in the current
pay-as-you-go system. []
The pension changes would be some of the biggest changes
since the initial post-communist switch to a market economy in
the early 1990s.
They are aimed at balancing the budget by 2016 and setting
it on course for long-term stability. They would also build an
asset base to be invested in capital markets.
Other reforms on the agenda include mainly healthcare, which
is also running into deficits. Thousands of doctors threatened
to quit next month, forcing the government to hike their
salaries [].
Rating agencies have said the reforms are key for the
central European country's outlook. The Czech Republic is rated
A by Standard and Poor's and A1 by Moody's.
A lack of adjustments would lead to accelerating growth in
the country's debt load, now low by European standards at just
below 40 percent of gross domestic product.
Here is a look at the main points on the proposed pension
reform, which Necas said was 90-95 percent final, and other
plans of the centre-right cabinet.
PENSIONS
* Czechs spent 8.5 percent of GDP on pensions in 2008, below
the EU average of 11.7 percent, Eurostat data show. The average
monthly pension is 10,494 crowns ($582), versus the average
gross wage of 23,665 crowns.
* Last year, the system produced a deficit of 29.3 billion
crowns ($1.62 billion), 0.8 percent of gross domestic product.
* The system is bound to generate ever increasing deficits
and put ever larger strain on the budget, as the ratio of
workforce to pensioners declines due to population ageing.
* Voluntary pension savings complementing the system have
been too low to create sufficient padding for future pensioners.
Private pension assets are below 6 percent of gross domestic
product, less than half the number in Poland and Hungary and way
behind EU leaders The Netherlands with 130 percent and Finland
with 77 percent.
* Under the current system, a pension tax of 28 percent is
derived from all salaries. The funds are directed to pay for
pensions of current retirees, under a pay-as-you-go system.
* The reform plans to complement the current system with a
stronger private-savings component.
* The governing coalition has agreed to introduce a
voluntary opt-out from the current system for people under 35.
Those older than 35 will have until the end of 2012 to decide
whether to join. Those deciding to join will be locked in.
* Working-age people will be able to divert 3 percentage
points from their social tax, which will go to individual
savings accounts, matched by at least a 2 percentage point
contribution from their net salaries.
* After retirement the pensioner has to decide between
choosing a lifetime annuity that is not subject to inheritance
and payments for 20 years, which could be inherited.
COSTS
* The government sees total cost around 50-85 billion crowns
per year depending on the unemployment rate, including deficits
already accrued annually in the current pay-as-you-go system.
The overall revenues should match it and the whole system should
be budget-neutral.
* Finance Minister Miroslav Kalousek estimated the opt-out
will cost the state 20 billion crowns per year. This is based on
50 to 60 percent of workers participating.
* The coalition also agreed to lower the contribution that
employers pay on top of employee's social tax by 1.8 percentage
points, at a cost of 20 billion crowns to the budget every year.
* Current pensions will be raised at a cost of around 4
billion crowns.
* Tax rebates to compensate families for higher VAT will
cost another 6 billion crowns.
* The coalition estimates the gap in the current
pay-as-you-go system this year to be 35 billion crowns.
The government believes this should fall to 10-15 billion if
unemployment drops to 7-8 percent in the next few years from the
current elevated level of 9.7 percent.
REVENUES
* To help pay the costs the government wants to unify the
value-added tax at the current higher rate of 20 percent.
Several staple food items will be kept at the lower rate of 10
percent.
The VAT change should take place as early as 2012, although
parties have not yet agreed on this.
* The government estimates the VAT unification will bring
government revenue of 58 billion crowns per year, which will
help pay for the reform as well as the deficit already in the
current system.
* Other than a higher tax, the coalition plans to direct
dividends from state-owned companies, mainly energy firm CEZ
<>, to the system. Last year the state received 20
billion crowns from CEZ.
MORE REFORM PLANS ON AGENDA
Healthcare:
* Czechs spent 6.9 percent of their GDP on healthcare in
2008, according to Eurostat. France tops the EU list with 10.7
percent, and Romania spends the least, 5.25 percent.
* Under current rules, treatment deemed necessary by doctors
is covered by universal health insurance. All patients pay a 1.2
euros to see a doctor and for drug prescription.
* The amount of private contribution is small and mostly
focused to extras such as better tooth fillings and cosmetic
treatment. Some expensive drugs are not covered by insurance.
* The plan is to raise private payments and allow easier
distinction between standard care and extras. Patients would be
allowed to choose a more expensive treatment, material and drugs
and cover the difference above the defined standard.
* The Health Ministry proposes to cut price ceilings on
drugs and to have control over purchases of new equipment, which
have been one of the possible corruption gates when hospitals
bought overpriced or unnecessary machinery.
Other:
* Restructuring the flat-tax personal income tax rate to
remove the system under which tax for high earners goes down.
* Lowering the ceiling for individual contributions to
social and health insurance. This would cut the maximum salary
contributions are derived from to three or four times the
national average from the current six times the average, a very
high ceiling by European standards.
* The Finance Ministry aims to clean up the tax law by
cancelling most tax exceptions.
(Compiled by Robert Mueller and Roman Gazdik, editing by Jan
Lopatka and Catherine Evans)
