Pension Reform through Voluntary Opt-Out: The Czech Case

The importance of long-term public finance sustainability in the context of current fi-nancial crisis is still seen as one of the basic factors of economic stability. Demographic development resulting in higher percentage of people in retirement age versus economi-cally active people is one of the main risks. There is a growing pressure on expenditures of age-related systems. For this reason the pension scheme reforms are major issue in advanced countries. While some countries have chosen strictly regulated approach towards pension reform, some have given its citizens a choice whether to stay in the old system, or whether to switch to a new one. Such a decision is very complex and whenever the choice was implemented, many more workers switched to a new system than was ex-pected. In our paper, we present a micro-based simulation model for the Czech Republic that allows us to model the individuals ’ switching decision using several economic and be-havioral factors within an old (PAYG DB) and new (FDC) systems. It allows us to esti-mate the proportion of people who would opt-out to a funded pillar. Our results indicate that under the assumption of rationality and long run predictabili-ty of most parameters, only a small fraction of population would choose the multi-pillar scheme. However, this conclusion holds only under a full rationality. Once we relax this assumption, a wide range of switching strategies become viable. Therefore, the expecta-tions that the switch will be popular cannot be based only on economic factors, but must also incorporate behavioral aspects, such as the risk of aversion. 1