Czech Republic: Proposed state pension reforms

Employer Action Code: Monitor

Parliament is considering state pension reforms primarily aimed at ensuring the system’s long-term sustainability as well as streamlining certain processes. Many of the current proposed changes were initially considered as part of a 2023 reform package that came into force on October 1, 2023; however, due to opposition in parliament, the majority of the package’s original proposals were put on hold. Some of the current proposals are also expected to face stiff opposition.

Key details

Proposed changes include the following:

• Increase normal retirement age (NRA) — now age 65 for those born since 1965 — by between two and seven months, based on year of birth, for those born between 1966 and 1972. For persons born in 1973 or later, NRA would be calculated in the year the person reaches age 50, as age 65 plus the difference between future life expectancy from that year and life expectancy from the year 2015, subject to the resulting NRA being within two months (higher or lower) of NRA for persons born in the prior year. The intent is to maintain an expected payout period after NRA of 21.5 years.
• Modify the pension formula to result in lower benefits for retirements after 2025 by:
• Reducing the percentage applied to the first tier of average monthly pay (i.e., average pay up to 19,346 koruna (CZK) in 2024). Currently, the percentage is 100%; the proposal would reduce it by one percentage point each year between 2026 and 2035 (ending at 90%).
• Reducing the benefit rate that is multiplied by average pay and years of service in calculating the pension amount. Currently, the rate is 1.50%; the proposal would reduce it evenly each year between 2026 and 2035, when it would reach 1.45%.
• Eliminate the employee social security contribution (6.5% of covered pay) for retirement, death and disability benefits, for pensioners who continue to work beyond NRA, to incentivize older workers to remain in employment.
• Credit social security contributions for periods of unpaid family leave based on the average national wage for the purposes of earnings-related pension calculations. This would gradually replace the CZK500 monthly pension supplement (introduced in 2023) for parents who have primary responsibility for caring for a child.
• Allow couples to elect a joint pension (shared equally) that is calculated on their combined pay history, for pensions starting after 2026.

Employer implications

The Czech Republic’s aging population, driven by a low birth rate and increased life expectancy, has raised concerns about the sustainability of the social security system. The reforms are intended to reduce pressures on public spending by gradually reducing retirement benefits and encouraging employees to work longer; however, as the reforms would largely reduce benefits, they are generally unpopular and thus face strong opposition. Just under 60% of employers surveyed offer some form of supplemental retirement benefit, typically contributions to employees’ voluntary individual retirement plans, but employer and employee contribution rates to the plans tend to be low (3% each at the median). The reduction in retirement benefits from social security may encourage employees to take a greater interest in supplemental retirement benefits. Companies should monitor the status of the reforms.