Retirement Reform Group Results

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• Retirement Reform Group Results
• Prague, 7.3.2005

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Contents

• Mandate of the group
• Structure of the group and implementation methods
• Extent and form of our analysis
• Analysis of the current state DB system basic
  variation
• Parametrical modifications to the current system
• The variations presented by the political parties

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The Groups Mandate

• Technical Work the modeling procedures
• Analyze the current PAYG DB system
• Analyze the possibilities for parametrical
  modifications to the current system
• Analyze the political parties variants for
  reforming the current system
• Technical service for the political parties
  experts clearly specify the parameters and
  settings of the reform proposals
• ? The working group does NOT manage the process
  of finding consensus among the political parties

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Structure of the Group and its working procedures

• The group has three layers
• An executive team (5 people)
• Responsible for modeling work
• Publish the foundations and results of the
  analysis (www.reformaduchodu.cz)
• The working group (1 to 2 representatives from
  the political parties)
• Work in close cooperation with the executive team
• Prepare the foundations for the political
  parties experts
• Team of experts (1 to 2 experts from the
  political parties)
• Discuss (but not ratify) the results of the Exec.
  Team
• Modify the settings of the analyzed variants

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Extent and shape of the analysis

• Prepare a long term macroeconomic structure
• Together with a demographic prognosis, create a
  starting position for modeling the retirement
  system
• Modeling analysis of the pension system

• MACRO financial criteria
• Expenses of the system
• Total compensation level
• Income to the system
• Balance of the system
• Debt of the system
• ? Evaluate the long term financial stability of
  the system

• MICRO financial criteria
• Individual compensation level
• Internal measurement of yield
• Implicit tax
• ? Evaluate the effect of the system on the
  individual (PTJ)

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Basic variation

• The statutory age for retirement (63 years) is
  differentiated for women according to the number
  of their children
• Valorization of pension payment legal minimum
  (CPI plus 1/3 of the growth of real average
  wages)
• Pension sample without any changes while
  maintaining the existing level of redistribution
• Basic measurement indexed according to changes of
  average wages
• Reduction threshold indexed according to the
  development of average wages

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Basic variation
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Basic variation
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Basic variation
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Basic variation
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Basic variation - NP
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Basic variation - VMV
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Basic variation - ID
PTJ 75
PTJ 125
PTJ 100
PTJ 200
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Basic variation

• Long term financial sustainability
• Extent of deficit and implicit debt somewhat
  lower than that shown in some prior analyses ?
  pension reform easily realizable (lower
  transitional deficit)
• Significantly redistributes income
• The individual payment level (NP) and the rate of
  return of the system (VMV) decline relatively
  quickly with an individuals income growth
• For low income participants and women, it
  guarantees a high yield.
• It is not premium-mathematically neutral
• Prior to reaching the statutory age threshold, it
  motivates the individual to remain in the work
  force (a negative implicit tax)
• After reaching the statutory age threshold, it
  motivates the individual to leave the work force
• Differences in implicit taxation between men and
  women and between high and low income groups

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Parametrical modifications to the current system

• Partial analysis (impact of changes to individual
  parameters on the results)
• Age variants (65 years, 67 years, 69 years)
• Valorization scheme (wages, price, Switzerland)
• Modifications to the pension model (basic
  measurement, reduction threshold, reduction
  co-efficient, accruing factor, reducing early
  retirement)
• Combined variants
• Increasing the age threshold to 69 years for men
  and women, Swiss valorization, zero valorization
  of basic measurements
• Increasing the age threshold to 65 for men and
  women, maintain the existing minimal valorization
  of basic measurements

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Combined variants
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Combined variants
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Combined variants
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Combined variants
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Combined variants

• The present PAYG DB system can be parametrically
  changed to have long term financial
  sustainability
• The conditions are
• Increase the retirement age
• Slightly decrease the number of newly granted
  retirements (entire compensation level is lowered
  by 5 p.b.)
• Prevent overly generous valorization of
  retirement (higher VH enables more generous
  valorization)
• This solution has its deficiencies
• Maintenance of a high level of income
  redistribution (putting pressure on the premium
  component of the system)
• Maintenance of the premium rate at a relatively
  high level
• A high premium rate can lead citizens with high
  incomes (and low NP) to increase their
  compensation level from alternative sources.

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Variations of the political parties

• CSSD
• Implement an NDC system
• ODS
• Flat pension and a lowering of the premium rate
• KSCM
• Parametric modifications to the current system
• KDU-CSL
• Opt-out the possibility of voluntary partial
  obligations
• US-DEU
• Opt-out the possibility of voluntary partial
  obligation with an increase in the premium rate
  for the funding pillars accompanied by many
  parametric modification to the state pillar

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• Thank you for your attention