Page 9 - IDEA Study 7 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

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