* Right step but too modest
* Doubts many Czechs will sign up
* Limited impact on budget, limited future benefit
* Political risk from lack of cross-party support
By Jan Lopatka
PRAGUE, Feb 28 (Reuters) - A proposal to partially privatise
the Czech pension system risks attracting too few people who
will save too little money to meet the government's goal of
eliminating long term deficits and diversify retirement income.
Although analysts have praised the plan agreed in principle
last week for bucking a regional trend in Poland and Hungary of
rolling back pension reforms, on closer examination it looks
less robust than originally hoped.
The plan calls for the diversion of 3 percentage points from
a 28 percent social tax to adherents' private savings accounts
to diversify pensions now dependent almost solely on a state
pay-as-you-go system that is facing rising costs due to an
ageing population.
They would have to match that with another 2 percent from
their salary. But the total 5 percent has disappointed some
analysts who had hoped it would be closer to, say, the 9 percent
in Slovakia, and the voluntary nature is also exceptional.
"The government proposal is so cautious that is effectively
irrelevant, because nothing substantial is changing," Ondrej
Schneider, an economist at Institute for International Finance,
wrote in an article.
"Ninety percent of future pensions would still come from the
unchanged state pay-as-you go system."
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FACTBOX on key parametres of the plan []
INTERVIEW with the opposition chief []
INTERVIEW on regulatory changes []
Story on Poland's pension plans []
Story on Polish and Hungarian budget risks: []
Graphics on the demographics http://r.reuters.com/qat28r
Graphics on pension spending http://r.reuters.com/pat28r
Graphics on pension fund assets http://r.reuters.com/jad38r
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> Rating agencies have said successful pension, health and
welfare reforms would trigger rating upgrades for the Czechs,
who had lagged some of their contemporaries in former communist
eastern Europe on such reforms.
Thanks to debt below 40 percent of gross domestic product
and pledges to balance the budget by 2016, the Czechs are
already rated above Poland and Hungary at 'A' by Standard and
Poor's and 'A1' by Moody's.
WHO WILL VOLUNTEER?
Poland and Hungary's return to the issue of pensions reflect
left over problems with otherwise much-praised 1990s reforms
that have been exposed by budget tensions generated by the 2008
financial crisis.
Hungary's government has made a grab for the accumulated
savings in its privately-run system, and in a bid to rule out
such moves in future, the Czech government has shied away from
making the transfer to a partially fund-based pillar compulsory.
This could hurt participation, cutting it significantly
below the government's estimate of 50-60 percent. Some analysts
say it could be about one third of the 5 million workers.
"The major risk is that only a small part of the population
will opt in. This immediately creates the risk of... there being
a much larger share of the population that has not been saving
over its productive life and now finds its state-guaranteed
pension too low," Erste Bank said in a report.
"This could then lead to a minority -- the part of the
population that opted in -- finding its savings easily
confiscated as there would be an overwhelming majority clamoring
to get its hands on other people's private money. See Hungary
now."
Low participation would help the budget in the short run,
through a lower financing gap, but raise long-term pressures.
The government expects the reform to initially leave a hole
in state income, including 20 billion ($1.13 billion) in lost
contributions from those taking the opt out, and 20 billion from
a cut in social taxes paid by companies.
Another 15-20 billion will be required in social benefit
costs to offset higher inflation caused by the hike in value
added tax the government will use to pay for the programme.
That hike -- raising a lower value added tax rate of 10
percent to the regular rate of 20 percent, should bring in 58
billion crowns in revenues.
If the plan works as intended, in the long run it should
give people decent pensions from combined state payouts, which
will be lower, and savings.
The pay-as-you-go pension system had a shortfall of 30
billion last year, partially due to the economic crisis
weakening the labour market and partially from the long-term
rise in the proportion of pensioners to workers.
OPPOSITION THREAT
The International Monetary Fund (IMF) said the system still
needed additional parametric changes and warned it may only
attract richer Czechs, for whom the savings pillar versus giving
up part of state pension would look attractive.
"Likely self-selection by high-wage earners in opting out of
the redistributive first pillar may exacerbate the pressures on
PAYG finances in the long term," it said in a statement
concluding a mission to the Czech Republic.
Another drag for the reform may be that the opposition
Social Democrats came out strongly against some of its elements,
mostly the plan to raise the value added tax on a range of items
including most food, drugs, books and culture.
Acting party Chairman Bohuslav Sobotka said the Social
Democrats would not support the reform and may revamp, although
not abolish the system when they are in government.
"We are ready to alter parameters and give people the option
to return to the original system," Sobotka told Reuters in an
interview.
Jan Prochazka, an economist at Cyrrus brokerage and a member
of a government advisory panel,said the reforms were not
perfect but it was worthy as a starting point.
"We all see that it is not ambitious enough. But in my view
the most important thing is to make the first step which you can
adjust later."
(Editing by Patrick Graham)
