Page 9 - IDEA Study 7 2015 Working Beyond Pensionable Age

1. Introduction The pay as you go pension system in the Czech Republic is a complex system. Like other similar pension systems, its stability depends only on three key characteristics: 1) the ratio of workers to pensioners, 2) the replacement rate and 3) the pension system contribution rate. The ratio of workers to pensioners indicates the number of workers paying for one old age pension. The replacement rate represents the relationship between a worker's average wage and the average old age pension. Finally, the pension system contribution rate quantifies workers' contributions to pension benefits. In theory, it is possible to take the values of any two of these characteristics and calculate from them the value of the third one, which ensures the system's stability. However, it is not realistic to set any of these characteristics "too high" or "too low". The ratio of workers to pensioners typically rises when the population grows. When that happens, it is possible to increase the replacement rate (for example by increasing pension benefits), decrease the pension system contribution rate, or decrease the ratio of workers and pensioners (for example by reducing the retirement age) with no negative implication for the sustainability of the pension system. On the other hand, if the population is aging the ratio of workers to pensioners typically decreases. In that case, in order to preserve a balanced system, it is necessary to decrease the replacement rate, increase pension system contributions, or increase the ratio of workers to pensioners, for example by supporting employment. In the second half of the 20th century, the population of European countries grew, the ratio of workers and pensioners was high and, therefore, pension systems were sustainable. This has not been the case since the beginning of 21st century; in the majority of European countries, the population has stopped growing due to low fertility and population aging. This means that it has been necessary to reset the three key characteristics in order to restore the sustainability of the European pension systems. The Czech Republic, along with many other European countries, increased its statutory retirement age in order to maintain the stability of its pension system by increasing the ratio of workers to pensioners. In contrast with other European countries, the Czech Republic set its retirement age to continue rising indefinitely. These changes in retirement age affect the ratio of workers to pensioners because the majority of healthy individuals are used to working until they reach the statutory retirement age. Therefore, an increase in the statutory retirement age incentivizes people to keep working for longer; hence the ratio of workers to pensioners rises. However, changes in retirement age do not incentivize the elderly to continue to work after reaching retirement age. An isolated increase in the statutory retirement age could cause the vast majority of individuals to continue working until they reach the new, higher retirement age, but they will still leave the labour market immediately upon reaching that age. Therefore, it is important not only to set the statutory retirement age very carefully, but also to establish institutional incentives for employment after that retirement age. The first instrument motivates to work individuals before statutory retirement age; the second provides incentives to healthy individuals beyond statutory retirement age, who are still 7