The demographic outlook is relentless: the Czech Republic is aging. Both individuals and society as a whole will have to cope with this. And especially the social and healthcare systems. But this is not a problem that can be easily solved. Nor is it a problem that will arise overnight. The Czech Republic and the whole of Europe are facing the daunting task of solving the problem of an aging population.
The Czech Republic is slowly but surely turning into a country of the old for the old. In 2020, the 65+ category accounted for less than a third of the population. In exact numbers, 2.17 million people currently fall into the 65+ category. In the second half of the 21st century, this group is set to grow to one-third of the entire society. There are several reasons for this.
The first is the strong year classes of so-called Baby Boomers, i.e., children born after the Second World War.
The second will be the so-called Husak children. Gustav Husák was the General Secretary of the Communist Party and later President of Czechoslovakia, under whose rule the state pursued a robust pro-family policy from 1970-1980.
Since the fall of communism and the restriction of pro-family policies, the birth rate in the Czech Republic has been on a downward trend. While from 1970-1980, the birth rate was as high as 200,000 births per year, in 1989, only 130,000 children were born. For completeness of comparison, in 2022, only 99,000 children were born.
A continuous system without continuous contributors
Like many other European countries, the Czech Republic uses a Pay As You Go (PAYG) pension system. This is a system to which current employees contribute, and these funds are automatically redistributed to pensioners.
However, this system has one major drawback. It becomes precarious and loss-making if there are more pensioners than contributors. And this could one day be a problem for the Czech Republic if no change is happening.
Currently, the so-called dependency index is at 32.6. This means that for every 100 employed payers, there are 32.6 pensioners. That is one pensioner for every three employees. However, demographers say if the system is not modified or the birth rate doesn’t go up, the dependency ratio could be 1:1 around 2050. For comparison, in 1993, the index was 19.2.
Another significant financial burden is the strain on the health system. Over the last five years alone, annual health expenditure for people over 65 has risen by EUR 844 million annually.
Financial problems and possible solutions
A significant problem for pensioners themselves is their ever-worsening financial situation. The average pension to net wages ratio continually oscillates between 50 and 55 %. Whereas in 1994, the ratio was 55.8%, today, it is 54.5%. After all valorizations, the average pension in 2023 will be EUR 867, and the Ministry of Finance predicts the average net wage to be EUR 1593.
Pensions are increased for pensioners through so-called statutory indexations, which occur yearly according to the law. And what’s crucial to note is that even though the 54.5 % ratio sounds high, the problem is that it, combined with the statutory indexations, cannot cover the 17% inflation gripping the Czech Republic.
And what is the solution to the whole situation? In short, very complicated. The main thing that needs to happen is the long-delayed pension reform. According to the information, this should bring some unpopular steps, such as raising the retirement age, which is currently set at 65. The current proposal is for a new limit of 67.
However, the reform foresees an adjustment and deep restructuring of the pension system. Thus, the age of 67 would not apply to those working in constrained environments. For such workers, employers will contribute more significant amounts to the state budget.
Czech demographics jokes
There is also talk of a realignment of family policy, which the government says should increase the birth rate to ensure “more payers.” The state also plans to encourage employers to hire older people who are discriminated against in today’s labor market. But sociologists predict that future retirees will be much more efficient workers than the current ones.
This major pension reform is planned to be introduced by the current Czech government in late April 2023. This big reveal is eagerly awaited by both current pensioners and especially today’s young people, who will be mainly affected by this new system.
But the Czechs would not be Czechs if they could not make fun of this tense situation. As a new joke circulating among people says: “I don’t mind working even now at 80. What bothers me more is that I can’t remember where I work every morning.”