3. First layer of social protection for older people

Abstract

This chapter focuses on the first layer of old-age social protection in the Czech Republic. Schemes discussed here help protect older people with insufficient work history to be eligible to a contributory pension or, more generally, with low retirement income against falling into poverty. The chapter investigates the interaction of the different first-tier schemes and concludes with policy recommendations to improve them.

3.1. Introduction

The first layer of social protection for older people in the Czech Republic consists of first-tier benefits from the contributory pension scheme and several non-contributory safety-net benefits. Currently, nearly all of the about 2 million people aged 65 or older receive contributory old-age or survivor pensions (or both), which include the basic pension amounting to about 10% of the average wage. In addition, 465 000 safety-net benefits support people aged 65+, some of whom receive several benefits. Among these schemes, health-related benefits are predominant while social assistance plays a minor role. Overall, the effective coverage of older people by the first layer of social protection in the Czech Republic is universal.

The contributory old-age pension includes two first-tier components: a flat benefit (basic pension, which is thus independent of earnings), and a minimum amount for the earnings-related benefit (minimum pension). In total, the contributory pension sets a floor on pension income for old-age pensioners – depending on eligibility conditions – independent of their previous earnings levels, equalling about 12% of the average wage, which is roughly half the average value among the 24 OECD countries with such schemes.

In addition, all residents may be eligible to benefits from the safety net, which guarantees a minimum income to all Czech residents in need. The guaranteed income is equal to about 10% of the average wage, slightly below what is offered by the first-tier elements of the contributory pension but only about half the average level in the OECD. The safety net provides care and mobility allowances for people with disabilities, a housing allowance for low earners and social assistance (“assistance in material need”) in case of both low income and low assets.

The guaranteed minimum income, which is the calculation base for the social assistance benefit, is nominally fixed and, unless passing a new law, can only be changed if inflation exceeds 5% or in case of extraordinary circumstances. As only limited adjustments have been made since the introduction of the scheme in the early 1990s, its value has decreased substantially relative to wages, from more than 30% of the average wage in 1991 to about 10% in 2019. A further fall back of the social assistance relative level would further question whether it can ensure an adequate living minimum when own earnings capacity is limited as in old age.

Today, recipient numbers of non-health related safety-net benefits are low. The reasons for this are complete employment histories in the former Czechoslovakia, record-low income inequality since then, generous validation of non-contributory periods for old-age pensions, especially in the past, and high homeownership rates. The number of pensioners that spent (parts of) their career in former Czechoslovakia will continue to steadily decline while higher reported unemployment, in particular in the 1990s and 2000s, will have more impact on pension benefits. Consequently, a growing share of older people may not reach the high number of minimum contribution years in the Czech contributory scheme in the future and may have to rely on safety nets.

This chapter analyses the schemes that provide the first layer of social protection for older people in the Czech Republic. The following section gives an overview of the current income situation of older Czech people and compares it to other OECD countries. Section 3.3 shows recipient numbers for pensions and safety-net benefits and related expenditure. Section 3.4 presents the different schemes that form the first layer of social protection while Section 3.5 analyses their future challenges and discusses policy options for reform.

3.2. Low inequality and low incidence of income poverty among older people

3.2.1. Income inequality among older people is low

Income inequality in the Czech Republic is low. In 2017, the Gini index of disposable income – an inequality indicator that equals 0 if every person receives the same income and 1 if one person receives all income – was below 0.20 for the population aged over 65, the lowest among OECD countries with an average of 0.31 (Figure 3.1, Panel A). It is below the inequality level (measured by the Gini index) in the total Czech population, which is equal to 0.25.

The very low inequality among the Czech elderly results from a flat distribution of income across all income deciles. The income at the first decile, below which are the lowest 10% of incomes among people aged over 65, is relatively high, equalling 69% of the median income of the 66+. The income level at the other end of the income distribution is relatively low, at 158% for the ninth decile, above which are the highest 10% of incomes (Figure 3.1, Panel B). As a result, the 50-10 and 90-10 percentile ratios equal 1.5 and 2.3, respectively, far below the corresponding OECD averages of 1.9 and 3.9. The key explanatory factors for the flat distribution of old-age income are the low wage inequality both in former Czechoslovakia and since then, which has generated a very compressed distribution of pension entitlements, and a highly redistributive pension system (Chapter 1).

Figure 3.1. Low old-age income inequality among OECD countries

3.2.2. Low incidence of relative income poverty at older ages

The average disposable income of the Czech population aged over 65 was 26% below that of the total population in 2017. This compares with 13% below in the OECD on average and is one of the lowest relative old-age income levels among OECD countries (Figure 1.6 in Chapter 1). Among the older Czech population, almost four-fifths of disposable income comes from public transfers. The remainder is mostly work income while income from savings or other capital plays only a minor role OECD (2019, p. 185[1]).

Despite low relative income levels of the older population, the old-age income poverty rate, measured as the share of people older than 65 with income below half the Czech median income, is relatively low in international comparison, equal to 7.4% in 2017. As in most other OECD countries, the risk of relative poverty rises with age among the elderly, from 6.5% for the 66-75 year-olds to 9.2% for those aged 76+ (Figure 3.2). Moreover, older women are much more likely to be income-poor than older men (11.0% of women versus 2.7% of men among the 66+) as in nearly all other OECD countries, with the OECD average rates equalling 16.5% and 11.6%, respectively. As in almost all countries, this higher poverty risk of older women compared to older men is largely driven by a larger poverty risk of one-member households that are more common among women than men (MOLSA, 2019[2]).

Extreme vulnerabilities are rare in the Czech Republic as among the elderly living in relative poverty the average income is “only” 11% below the relative-poverty threshold (50% of median income): this so-called poverty depth is among the lowest in the OECD where it is more than twice as large at 23% on average (Figure 3.3).

Figure 3.2. Old-age relative income poverty rate is comparatively low in the Czech Republic

Figure 3.3. Poverty depth of people aged over 65 is particularly low in the Czech Republic

3.2.3. Living standards have improved but old-age relative income poverty has increased

Living standards in the Czech Republic have benefitted from the strong development of the economy, which led to a marked increase in real wages, in particular since 2015.1 Most people have also experienced a rising disposable income in real terms and the incidence of material deprivation – an indicator of absolute poverty – has plummeted in all age groups (Figure 3.4).

In the Czech Republic, as in most OECD countries, average wage gains are only partly transmitted to pensions in payment as earnings-related pensions are indexed to a mix of price inflation and wage growth rather than fully to wage growth (Chapter 1). Therefore, the mean disposable income of older Czech people has risen less strongly between 2004 and 2017 than among other age groups (Figure 3.5, Panel A). Consequently, relative income poverty, which is measured relative to the median income in the total population, has risen among older people – in particular for women (MOLSA, 2019[2]) – unlike in all other age groups (Figure 3.5, Panel B). Moreover, a flat old-age income distribution leads to comparatively strong fluctuations in relative poverty measures over time.

Figure 3.4. Material deprivation has plummeted among all age groups

Figure 3.5. Incomes have grown substantially among older people, yet at a slower pace than among other age groups

3.3. Recipients of pensions and safety-net benefits and related expenditure

3.3.1. Recipients

In December 2018, about 2 million people aged 65+ received a contributory pension in the form of an old-age pension, survivor pension or both.2 This implies that almost everyone aged 65+ is covered.3 Only a small number of people has to rely on other personal or household income, assets or the safety net.

There were about 465 000 non-contributory safety-net benefits paid to people aged 65 or older in 2018, most receiving on top the contributory pension as the latter achieves almost full coverage. This would correspond to about 22% of the population in this age group, yet the effective coverage ratio is lower as some receive several non-contributory benefits.

Care allowances make up more than half of all safety-net non-contributory benefits among older people (Figure 3.6). Another third are mobility allowances for people with disabilities. Only about 50 000 older people received a benefit unrelated to health in 2018, a vast majority being beneficiaries of the housing allowance. Less than 6 000 people aged 65+ received social assistance, which is based on stricter means testing than the housing allowance, including the evaluation of both income and assets.4 Consequently, receivers of social assistance are usually also beneficiaries of the housing allowance unless they live in a form of housing that does not qualify for the benefit. Additional safety-net schemes are available for people aged 65 or older, but they play a minor role.5

Overall, old-age safety-net benefits that are unrelated to health are almost irrelevant in the Czech Republic today. A low level of income inequality and a high coverage rate from contributory pensions are the main drivers of this pattern. However, changes in contribution histories combined with potential measures to improve financial sustainability (Chapter 2) are factors that may increase the number of people that will have to rely on the safety net in the future (Section 3.4).

3.3.2. Public expenditure

Public spending on safety-net benefits paid to older people is low. In 2019, the expenditures for care and mobility allowances – the two main health-related safety-net benefits – equalled 0.36% of GDP. Less than 0.02% of GDP were spent on the housing allowance and an even much smaller amount on social assistance. This compares to slightly more than 6.3% of GDP spent on contributory old-age and survivor pensions for people aged 65+, including about 1.5% of GDP for the flat component (basic pension).6 Total spending on old-age and survivor pensions irrespective of age was 7.3% of GDP. The comparatively low spending on old-age safety-nets is primarily due to low recipient numbers, but also to low social assistance benefits.

Housing allowance expenditures for older recipients have substantially increased in recent years, from an extremely low level, while social assistance spending although increasing has remained negligible from a public-finance perspective (Figure 3.7). Housing and living costs have strongly increased over the last decade while the social assistance benefit level has only slightly been raised in nominal terms.

Figure 3.6. Few recipients of non-health related safety-net benefits in older age

Figure 3.7. Expenditures on housing allowance and social assistance for people aged 65 or older

3.4. Benefits in the first layer of social protection for older people

3.4.1. First-tier pensions in the contributory pension scheme

All pensioners receive the basic pension, the level of which is independent of prior earnings and length of contribution history. A minimum pension for the earnings-related component combined with the basic pension sets a floor to the pension benefit level. Eligibility for the old-age pension (both basic and earnings-related components) is based on the length of the contribution history. Retiring at the statutory retirement age requires a contribution length of 30 years or 35 years including validated non-contributory periods (Chapter 1). People with more than 15 years of contributions (or 20 including validated non-contributory periods) can retire 5 years after the statutory retirement age for men.

The Czech Republic – together with the Slovak Republic – stands out among OECD countries with a very long minimum contribution period of 30 years to receive a contribution-based basic or minimum pension at the statutory retirement age. Among the 24 countries with such schemes – the 12 other OECD countries rely exclusively on non-contributory benefits for first-tier pensions – only Chile, Hungary, Italy, Luxembourg and Mexico also request 20 years or more (Figure 3.8). The other 17 countries with contribution-based basic or minimum pensions set considerably lower period thresholds, with the OECD24 average equalling about 14½ years. In some countries, the lower threshold is combined with providing prorated benefits that grow with the length of the contribution period. Pensioners in Ireland, for example, receive a pension with at least 10 years of contributions while the full benefit is paid from 40 years. Among the nine countries with a contribution-based basic pension, the Czech Republic is the only one that does not provide a prorated benefit. About half of the countries with a minimum pension, including the Czech Republic, do not prorate benefits either.7

Almost the whole population aged 65 and older receives a pension from the contributory scheme as they fulfil this very high required number of contribution years (Figure 1.12 in Chapter 1). The large coverage of the contributory scheme relates to two main factors. First, periods without contributions such as for education, unemployment, disabilities, care tasks and others are – or were in the past – largely credited as contribution years in the contributory pension scheme (Chapter 1). Second, pensioners, who retire today and especially those who are already in retirement, have spent a large part of their career in former Czechoslovakia with employment rates close to 100%. Those work periods have been fully credited as contribution years in the current contributory pension scheme.

Figure 3.8. Very high minimum number of contribution years for basic and minimum pensions in the Czech Republic

Future pensioners, however, may have faced more disrupted contribution histories. Validation of secondary and tertiary education periods stopped in 1996 and 2010, respectively (Chapter 1). Moreover, over time, the part of the career that a new pensioner has spent in former Czechoslovakia will have steadily diminished. The fall of the Soviet Union and the installation of market-based economies implied some significant disruption. In the transition years in the 1990s and early 2000s many people working in sectors with technologies far from the technological frontier lost their jobs and unemployment rates rose (Figure 3.9).

Based on projections by the Ministry of Labour and Social Affairs (MOLSA), people would reach the minimum number of contribution years two to eight years later in 2050 than in 2017. While in 2017 nearly all people aged 60 (hence born in 1957) reached the minimum number of years contributed or validated for the old-age pension, this is projected to be the case for 99% in 2030 (1970 birth cohort) and 89% in 2050 (1990 birth cohort). OECD simulations presented in Chapter 2 suggest that a substantially smaller share of people will reach the minimum contribution period for an old-age pension, equalling about 90% at the statutory retirement age in 2060 compared to 97% according to MOLSA projections. Moreover, non-standard forms of work, which may be rising, are not as well covered by the contributory scheme as standard employees (Chapter 1 and OECD (2019[1])). In sum, more people may have to rely on the safety net in the future.

In 2019, the contribution-based basic pension was increased from 8.5% to 9.6% of the average wage (OECD definition – from 9% to 10% according to the national definition)8 compared to 13.6% on average among OECD countries with such a scheme (in 2018). Based on its indexation to the average wage, it will remain at this relative level of 9.6%. The minimum pension level in 2019 was equal to 2.2% of the average wage.9 It has no indexation mechanism, neither to wages nor to prices and is therefore likely to lose value in relative and real terms over time. In sum, the contributory pension guaranteed in 2019 a pension income of 11.8% of the average wage, far below the OECD24 average of 22.1% (in 2018, Figure 3.10). This is much lower than in the late 1990s where it was close to 17% of the average wage (Figure 3.13 below). The sharp fall in relative terms in the 2000s is due to both rather few discretionary increases to the basic pension before wage indexation was introduced in 2011 and the stability of the minimum pension in nominal terms. The number of recipients benefiting from the minimum pension is very low today, implying that the vast majority of eligible retirees have pension income beyond the guaranteed level.

Figure 3.9. The unemployment rate peaked in the after-math of former Czechoslovakia

According to projections by MOLSA, the risk of poverty will continue to grow for future pensioners under the current pension rules, with a break around 2040 when a large number of elderly pensioners with low pensions is expected to be replaced by new pensioners that enter retirement with higher pensions (Figure 3.11). The reform proposal of the Commission for Fair Pensions proposes to triple the basic component from 10% to 30% of the average wage, which would bring the Czech Republic closer to countries like Austria, Slovenia and the Slovak Republic.10 Implementing this proposal would lift pensions in particular for part-timers at the lower end of the earnings distribution (Figure 1.30 in Chapter 1). Rising relative poverty risks might thus be contained.

Figure 3.10. Contributory first-tier benefit level in OECD countries

Figure 3.11. Reforming the pension system could contain the risk of rising relative old-age poverty

3.4.2. Housing allowance

The housing allowance is a more broadly accessible social benefit as it is not based on asset or health tests in contrast to the other main safety-net benefits available to older people. Only household income is tested, potentially after checking the claimed housing costs.11 The benefit is paid to both homeowners and renters.12 Every household that could not cover justified housing costs with 30% of net household income (35% in Prague) receives the benefit to fill the gap. Justified housing costs are the true costs up to a prescribed ceiling for energy, housing-related services and the rent or comparable costs given by law for homeowners. This ceiling depends on the type of housing (homeowner or renter), the size of the municipality and the number of people living in the household (Table 3.1). It is adjusted every year according to changes in housing prices.

For example, the ceiling amount for one person living alone in a rental accommodation in Prague in 2019 equalled 25.8% of the average wage. Hence, such a person with true housing costs at least equal to the ceiling receives a housing allowance if her net income is lower than 74% (=25.8%/35%) of the average wage. By contrast, the same person living in her own house receives a housing allowance when income is less than 42% (=14.6%/35%) of the average wage. The lower amount for homeowners reflects lower running housing costs due to the absence of a rent payment. Similarly, lower housing costs than the prescribed ceiling lower the income threshold up to which the housing allowance is paid (and the level of the housing allowance).

Table 3.1. Prescribed housing costs determine the eligibility to and the level of housing allowance
Prescribed ceiling housing costs for rental accommodations and residential property 2019, percentage of gross average wage
Number of persons in household	Size of municipality
Number of persons in household	Prague	over 100 000 inhabitants	50 000 – 99 999 inhabitants	10 000 – 49 999 inhabitants	under 9 999 inhabitants
Residential property
1	14.6	14.6	14.6	14.6	14.6
2	20.9	20.9	20.9	20.9	20.9
3	28.3	28.3	28.3	28.3	28.3
4+	35.3	35.3	35.3	35.3	35.3
Rental accommodation
1	25.8	20.5	19.5	16.6	16.0
2	35.8	28.6	27.3	23.3	22.5
3	47.9	38.4	36.7	31.5	30.4
4+	58.9	47.4	45.4	39.2	37.8
Note: The income test associated with applying for the housing allowance evaluates income in the previous quarter. The gross average wage used here refers to 2018, thereby reflecting most closely a test situation in January 2019.
Source: Information provided by the Czech Ministry of Labour and Social Affairs and OECD (2019[3]).

3.4.3. Social assistance (Assistance in Material Need)

The social assistance scheme in the Czech Republic (Assistance in Material Need) guarantees a legally defined living minimum after housing cost. It is open to all age groups, hence not generating specific entitlement for people at older ages. It provides a living allowance (which may be topped up by a housing supplement as further explained below) and extraordinary immediate assistance, subject to a strict means test that involves evaluating both income and assets. Moreover, real property other than the main residence has to be sold or rented out, and eligible entitlements accrued within private pension contracts have to be claimed, before eligibility to social assistance can be granted. People who have not reached age 68 and do not receive a contributory old-age or disability pension are required to search actively for a job. Social assistance benefits are non-taxable.

The living allowance is calculated as the sum of the legal living minimum and “reasonable” housing costs, less the relevant household income. The legal living minimum increases with the number of adults (and dependent children) in the household. “Reasonable” housing costs are equal to the justified housing costs, as defined above in the housing allowance rules up to a ceiling of 30% (35% in Prague) of relevant household income. The latter is made of 70% of net earnings from work, 80% of pensions and benefits from unemployment and sickness insurances, and 100% of all other income excluding disability and housing allowances.

A housing supplement to the living allowance is only paid to the lowest-income households who either also receive the housing allowance or cannot qualify for the latter as they live in non-standard housing forms. It guarantees that the total household income, including the housing and living allowances, cover both justified housing costs and the legal living minimum.

Currently, the legal living minimum is equal to CZK 3 860 per month for a single-person household (or about EUR 142). It was last raised in April 2020 from its previous level of CZK 3 410, which is about 10% of the 2019 average wage. This is one of the lowest levels in the OECD and equal to about half of the OECD average (Figure 3.12). The safety-net benefit level is below 15% of the average wage in only one-quarter of OECD countries, while it is larger than 25% in about one-third.

Figure 3.12. Non-contributory first-tier benefit level

The legal living minimum is only modified on a discretionary basis. The government can adjust its level by decree, i.e. without passing a new law, only if price inflation exceeds 5% or in case of extraordinary circumstances. By contrast, the housing allowance is adjusted every year according to the evolution of housing prices in the rental and residential property markets.

Few changes to the living minimum have been made since the introduction of the social assistance scheme at the beginning of the 1990s, and so its nominal value has increased much less than the wage level. The social assistance level has also not kept pace with growth in the minimum wage and the level of first-tier contributory pensions (the sum of basic and minimum earnings-related components) (Figure 3.13).

The living minimum was last adjusted in April 2020 after having remained unchanged since January 2012. The increase of about 13% since 2012 is lower than price inflation and average wage growth, which amount to about 15% and more than 30%, respectively. Overall, the living minimum lost two-thirds of its relative value, falling from 32% of average earnings in 1991 to 21% in 2006 and 10% in 2019.

Figure 3.13. The safety net protects less and less against old-age poverty

3.4.4. Interaction between housing allowance and social assistance

The social assistance benefits and the housing allowance are closely connected. While the benefits from the two schemes are managed independently, the design of the means tests implies that every person eligible for the living allowance is also eligible for the housing allowance (with the exception of non-standard renters as explained above). The opposite is not true as the means test for the living allowance is stricter. The housing supplement to the living allowance guarantees that the net income after justified housing costs (see above) always remains above the living minimum. Its design is complex but it ensures that total income keeps growing with pension income – that is, benefits are not fully withdrawn against pension income including for low earners.13

Figure 3.14 shows the benefit levels of housing allowance, living allowance and housing supplement for retirees with different levels of net pension income, assuming that they have no additional income and that their true housing costs equal the prescribed cost ceiling. As explained before, the housing allowance is paid to pensioners living alone with a net pension income lower than 42% of the gross average wage for homeowners and 74% for renters. The maximum housing allowance is paid to pensioners with net income below the living minimum (about 10% of average wage; Figure 3.12), and declines beyond the living minimum with a withdrawal rate of 35% (i.e. CZK 35 of the housing allowance benefit is withdrawn for any CZK 100 of additional income). Retirees with income below about 25% of the average wage receive the living allowance from social assistance. The living allowance might be topped up by the housing supplement. To put things in perspective, Figure 1.7 in Chapter 1 shows that a large majority of pensioners get pension benefits between 28% and 53% of the gross average wage.

In sum, current older beneficiaries of non-contributory benefits are most likely renters. For those living in Prague, total non-contributory benefits are withdrawn against net pension income at a rate of 65% up to about one-quarter of the average wage and then at a rate of 35%. Withdrawal rates outside Prague deviate slightly. The income thresholds for homeowners are lower. This structure with two withdrawal rates (a higher then a lower) is similar to that in Norway and Sweden, although the Czech rates are lower, avoiding sharp withdrawals against pension income (Valdes-Prieto, 2009[4]).

Figure 3.14. Interaction between housing allowance and social assistance for current pensioners

Eligibility to the housing allowance until relatively high levels of pension income could imply a large number of recipients. However, households composition and high homeownership rates – between 60% for low-income earners (bottom quintile) and almost 90% for high-income earners (top quintile) according to OECD Affordable Housing Database (2019[5]) – limit the number of recipients to about 2.5% of people aged 65 or older (Figure 3.6).

Looking forward, potentially lower relative pensions from more interrupted contribution histories may raise the number of allowance recipients among the elderly. Among individuals entering the labour market today, even those working over a complete career up to the statutory retirement age will be eligible to the housing allowance unless they have very high wages or are homeowners (Table 3.2) (or share the household with other income receivers). By contrast, workers who start their career five years later and experience a 10-year career break will have net pension income below 42% of the average wage even in case of high earnings and will, therefore, receive the housing allowance whether they are renters or homeowners.

Table 3.2. Net pension income and safety-net benefits of future pensioners
For full and interrupted careers at three earnings levels, in percentage of the gross average wage
Earnings level at work	Net pension income	Housing allowance	Living allowance incl. housing supplement	Net pension income	Housing allowance	Living allowance incl. housing supplement
	Panel A. Homeowner			Panel B. Renter
	Full career after entry at age 22
50	37.5	1.5	0.0	37.5	12.7	0.0
100	45.5	0.0	0.0	45.5	9.9	0.0
200	59.7	0.0	0.0	59.7	4.9	0.0
	Interrupted career: entry at age 27 + 10 years of unemployment
50	25.3	5.8	0.0	25.3	16.9	0.0
100	32.1	3.4	0.0	32.1	14.6	0.0
200	38.9	1.0	0.0	38.9	12.2	0.0
Note: For the cohort entering the labour market at age 22 in 2018 (or 27 in 2023), assuming that housing costs and parameters of both housing allowance and social assistance all grow with the rate of the gross average wage. A more comprehensive version of the table is in Annex Table 3.1.
Source: OECD Pension Model.

3.4.5. Health-related allowances and other safety-net benefits

On top of the benefits described above, older people may be eligible to several non-taxable disability and family allowances. While those benefits are not related to past contributions, they are subject to additional eligibility requirements. Care and mobility allowances are restricted to people with disabilities. They make up the major part of safety-net non-contributory benefits paid to older beneficiaries. Other safety-net schemes play a minor role. The family of an older person with a dependent child is eligible to a child allowance, subject to an income test. Parental and foster care allowances or a funeral grant are accessible for older people too, but there is a very small number of beneficiaries.

3.5. Future challenges and policy options

The population aged 65 and above is projected to rise by almost 50% by 2050 (or 1.0 million) while the total population would shrink by 6% (or 0.6 million) over the same period. The number of old-age pensioners will thus increase substantially and the number of people in institutional care facilities and receiving care at home are expected to more than double (European Commission, 2018[6]). Demand for care allowances, which are already the most frequently received safety-net benefit among older Czech people today, is therefore likely to rise further. This will increase the pressure on public finance (Chapter 2).

The number of recipients of safety-net (non-contributory) benefits is currently low among the elderly in the Czech Republic. Low income inequality, large coverage of older people through the contributory pension scheme and high homeownership rates are the most important explanatory factors. Today the low level of these safety-net benefits therefore has a limited incidence on poverty rates. The fact that the Czech Republic does not have a specific safety net for older people tends to limit the old-age benefit level as any increase applies to the whole eligible population generating a higher cost.

While the vast majority of current retirees validated enough contributions to be eligible to old-age pensions, future pensioners are likely to have faced more disrupted contribution histories during their whole career. The record-long contribution period to be eligible to the basic pension will therefore have an increasingly negative impact on preventing old-age poverty in the Czech Republic. This means that safety nets might play a bigger role. Their current level is very low in international comparison.

The first line of defence is to drastically reduce the minimum number of contribution years required to receive a pension. Ideally, eligibility for the basic pension should be possible with only one year of contribution, with the benefit level being pro-rated depending on the length of the contributed period. The principle is to ensure that additional contributions generate additional benefits. In Ireland, for example, basic pension entitlements rise proportionately with the length of the contribution period, from 10 years for the minimum benefit to 40 years for the full benefit. Moreover, the validation of non-contributed periods, which is complex and relatively generous, should be reformed, in particular relative to unemployment after age 55 (Chapter 1).

In terms of benefit levels, the current basic pension at 10% of the average wage is low in international comparison, and very low when taking into account that a long contributory period of 30 years is required at the statutory retirement age. Hence, with the introduction of a prorated benefit structure providing higher benefits for longer contribution histories, the full basic pension level should be significantly higher than 10% of the average wage. However, as discussed in detail in Chapter 1, the benefit level has to be assessed within the nexus of flat and earnings-related pensions. In particular, the substantial increase in the basic pension has to be combined with a lowering of accrual rates (and a simplification of the system). Moreover, the minimum pension is a redundant policy instrument given the contribution-based basic scheme. It currently plays a small role and, with the implementation of the recommended reform of the basic pension, it should be eliminated.

Social assistance provides an income guarantee (living minimum) to all Czech residents with insufficient work histories or low earnings in general. Its level is nominally fixed, and it substantially declined from more than 30% of the average wage in 1991 to 10% in 2019. This is very low in comparison to other OECD countries and might not effectively prevent relative income poverty in old age nor in working age. Social assistance and the contribution-based basic pension thus currently provide a very similar level of benefits. Such a combination is close in its effect to a residence-based basic pension provided to all older people, independent of prior contributions.14 Introducing a residence-based basic pension, on top of which contributory entitlements could apply, is part of the policy options the Czech Republic might consider to reform its first-tier schemes. Moreover, and in any case, social assistance benefits should be indexed to wage growth, especially given the larger role they are likely to play in the future, especially against the background of ageing prospects.

The social assistance scheme does not provide special benefits to older people. Providing such benefits would open the possibility to differentiate the benefit level between age groups and provide a higher level for those who have reached the statutory retirement age. While minimum income schemes might generate work disincentives, such concerns are of less importance to older people. With falling labour supply driven by population ageing, those older than the statutory retirement age who still want (or need) to participate in the labour market should be supported by adequate employment policies, which are, however, beyond the scope of this review (OECD, 2019[7]).

Among non-contributory schemes, housing benefits actually play a bigger role in terms of safety net than social assistance per se in the Czech Republic. The current combination of social assistance benefits and the housing allowance generates a good benefit structure based on a relatively low withdrawal rate at very low incomes and a higher rate thereafter.

Another policy option, which is also beyond the realm of pension policies, refers to the simplification of non-contributory benefits to avoid the multiplication of instruments with similar objectives. Housing allowance and social assistance are closely intertwined schemes that provide benefits to low-income individuals. The dual structure may create confusion about eligibility and benefit levels, generate strenuous effort and cost, for both individuals and the administration. Social assistance in the Czech Republic already includes components covering living, housing and exceptional needs, which would facilitate an integration with the housing allowance. However, potential social stigma associated with social assistance may then transmit to the housing allowance.

Key recommendations

Drastically reduce the minimum number of contribution years to be eligible to the basic pension.
Increase the basic pension level with the length of the contribution period (while adjusting accordingly the earnings-related component, see Chapter 1), ensure that the level acquired for 30 years of contributions is significantly higher than the current basic pension, and eliminate the minimum pension.
Index the social assistance benefit level to nominal wage growth.
Introduce a higher social assistance benefit level for people reaching the statutory retirement age.

References

[6] European Commission (2018), The 2018 Ageing Report: economic and budgetary projections for the EU Member States (2016-2070), Publications Office of the European Union, Luxembourg, https://doi.org/10.2765/615631.

[2] MOLSA (2019), Report on the state of the pension system of the Czech Republic and its expected developments, taking into account the demographic situation of the Czech Republic and to the expected population and economic development 2019, MPSV, Ministry of Labour and Social Affairs of the Czech Republic.

[1] OECD (2019), Pensions at a Glance 2019: OECD and G20 Indicators, OECD Publishing, Paris, https://dx.doi.org/10.1787/b6d3dcfc-en.

[3] OECD (2019), Taxing Wages 2019, OECD Publishing, Paris, https://dx.doi.org/10.1787/tax_wages-2019-en.

[7] OECD (2019), Working Better with Age, Ageing and Employment Policies, OECD Publishing, Paris, https://dx.doi.org/10.1787/c4d4f66a-en.

[5] OECD Affordable Housing Database (2019), HM1.3 Housing Tenures, http://oe.cd/ahd (accessed on 11 May 2020 via https://www.oecd.org/els/family/HM1-3-Housing-tenures.pdf).

[4] Valdes-Prieto, S. (2009), “The 2008 Chilean Reform to First-Pillar Pensions”, CES-IFO Working Paper, Vol. 2520.

Annex 3.A. Income of future pensioners before and after safety-net benefits and housing costs

Annex Table 3.A.1. Income of future pensioners before and after safety-net benefits and housing costs
Percentage of the gross average wage
Earnings level at work	Benefits upon retirement
Earnings level at work	Gross pension income	Net pension income	Housing allowance	Living allowance incl. housing supplement	Total net income	Prescribed ceiling housing costs	Total net income after housing costs
Panel A. Homeowner
Full career after entry at age 22
50	37.5	37.5	1.5	0.0	39.0	14.6	24.4
100	45.9	45.5	0.0	0.0	45.5	14.6	30.9
200	62.6	59.7	0.0	0.0	59.7	14.6	45.1
Interrupted career: entry at age 27 + 10 years of unemployment
50	25.3	25.3	5.8	0.0	31.0	14.6	16.4
100	32.3	32.1	3.4	0.0	35.5	14.6	20.8
200	40.8	38.9	1.0	0.0	39.9	14.6	25.3
Panel B. Renter
Full career after entry at age 22
50	37.5	37.5	12.7	0.0	50.1	25.8	24.4
100	45.9	45.5	9.9	0.0	55.3	25.8	29.6
200	62.6	59.7	4.9	0.0	64.6	25.8	38.8
Interrupted career: entry at age 27 + 10 years of unemployment
50	25.3	25.3	16.9	0.0	42.2	25.8	16.4
100	32.3	32.1	14.6	0.0	46.6	25.8	20.8
200	40.8	38.9	12.2	0.0	51.1	25.8	25.3
Note: For the cohort entering the labour market at age 22 in 2018 (or 27 in 2023) assuming that housing costs and parameters of both housing allowance and social assistance all grow with the rate of the gross average wage.
Source: OECD Pension Model.

Notes

← 1. Like in all other European countries, the COVID-19 crisis has led to severe economic disruptions that have put the recent trend of strong wage growth to an abrupt end in 2020.

← 2. Only very few cases of disability pensioners aged 65 or older exist as disability pensions usually end at the statutory retirement age and are replaced by an old-age pension if the eligibility criteria are met.

← 3. Most pensioners (97.5% of the 65+ population) are covered under the administration of the Ministry of Labour and Social Affairs (MOLSA). There are in addition pensioners who are ex-members of the armed forces administered by the Ministries of Defence, Interior and Justice (Chapter 1). The latter might account for a couple of percentages of the 65+ population. Indeed, according to the OECD Social Recipients Database, the total number of old-age and survivor pensions of all ages administered by MOLSA in 2016 equalled 3 083 177 while the corresponding number for pensions administered by the Ministries of Defence, Interior and Justice was equal to 61 514. Based on these data, approximately 1.9% (= 97.5% * 61 514 / 3 083 177) of the 65+ population received an old-age or survivor pension from the Ministries of Defence, Interior and Justice.

← 4. Among those, 3 000 people received an additional housing supplement as part of social assistance, which is only paid to the poorest beneficiaries (Section 3.4).

← 5. The number of older recipients of the Special Aid Allowance for persons with disabilities, the Immediate Emergency Assistance (component of the Assistance in Material Need), the Parental Allowance and the Foster Allowance remains below 2 500. Other benefits like a funeral grant for survivors are likely to have less than 2 500 recipients equal to or older than 65 too; yet data by age group are not available.

← 6. 6.3% of GDP (including 1.5% for the basic pension) are spent in the main contributory scheme administered by the Ministry of Labour and Social Affairs, which covers 97.5% of the 65+.

← 7. Austria, Belgium, France, Latvia, Portugal, the Slovak Republic and Switzerland follow a staggered approach, providing two or more benefit levels that rise with the length of the contribution period.

← 8. The OECD uses the concept of “average-worker” earnings from OECD (2019[3]) defined as the average full-time equivalent gross earnings. This deviates slightly from the concept used by the Czech social security administration.

← 9. Since 2019, the earnings-related component of the monthly pension is raised by CZK 1 000 once a pensioner turns 85. This bonus exceeds the level of the minimum pension, thereby effectively ruling out the receipt of the minimum pension above age 84.

← 10. The minimum pension would be eliminated (Section 1.5 in Chapter 1).

← 11. The relevant household income is measured net of social security contributions and income tax. It equals the sum of all income including child and parental allowances but excluding social assistance and health-related allowances. If the relevant household income is lower than the living minimum of the household as defined under the social assistance scheme (see below), the relevant household income equals the living minimum.

← 12. Except for non-standard rental forms such as sub-leases, hostels and lodging or boarding houses.

← 13. By contrast, for income other than pensions, against which the housing allowance is fully tested, social assistance is fully withdrawn against income for the lowest earners.

← 14. A preliminary version of the reform proposal by the commission for Fair Pensions recommends introducing such a scheme though at a substantially higher level of about 30% of the average wage. The latest reform proposal does not include such an option any more (Fair Pension Commission, 2019).

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