General information on the Act on pension insurance

The current organization of the Czech pension system started developing in 1990s, when partial reform steps were made and completed in 1995 by the adoption of the Act No. 155/1995 Coll., on pension insurance, which came into effect on 1 January 1996. Many partial reform steps were later adopted even while the act was in effect.

Since 1996 the basic pension insurance has been based on the following principles:

• social solidarity,
• pay-as-you-go,
• subject to meeting the established conditions the system is mandatory for all economically active individuals (while voluntary participation in the system is also allowed),
• the system provides compensation of income in case of old age (old-age pension), disability (disability pension) and death of the provider (widow, widower and orphan pension),
• the system is defined by benefits – the structure of the pension is calculated from two components
  • the first component is a basic assessment which is identical (equal) for all types of pensions,
  • the second component is a percentage assessment which depends on the insurance duration and income achieved in the decisive period before the pension was granted
  • the system contains no limitations of the pension amount, in terms of the fixed amount or percentage (unless you take into account the reduction of "income” in the pension calculation), not even in the case of entitlement to survivor´s benefits after one deceased person,
• the system is uniform (with a certain variation for self-employed individuals, which concerns the method of determination of the base for the assessment of the social security premium); the same applies for foreigners from third countries who shall have the same entitlement from the basic pension insurance as the other insured persons, as long as they meet the same conditions,
• the system is dynamic (many elements in the calculation formula for the pensions are modified every year „automatically“, taking into account economic developments, including indexing of the assessment bases),

Elements of the pension calculation formula

• decisive period, in which the income of the person is identified for the purposes of pension calculation,
• assessment base,
• general assessment base,
• recalculation coefficient to adapt the most recent general assessment base,
• growth coefficient of the general assessment base,
• personal assessment base and
• calculation base.

The decisive period, in which the gross income from gainful activities is identified, is a period before granting pensions. However income before 1986 are not taking into account. Annual assessment bases are the actually achieved assessment bases (essentially "gross incomes") in the individual calendar years of the decisive period, multiplied by the so-called growth coefficient of the general assessment base.

Growth coefficient of the general assessment base is determined using the applicable general assessment bases (determined by the government through an order by 30 September of the following calendar year, at the amount of the average monthly wage for the calendar year, as determined by the Czech Statistical Office) and recalculation coefficient (determined by the government through an order, according to data provided by the Czech Statistical Office about the average monthly wage for the concerned half of the year - it is determined as a ratio of the average monthly wage for the first half of the calendar year, which precedes by one year the year in which the pension is granted, and the average monthly wage in the first half of the calendar year, which precedes by two years the year in which the pension is granted). The growth coefficient of the general assessment base is determined as a ratio of the general assessment base in the calendar year which precedes by two years the year in which the pension is granted, multiplied by the recalculation coefficient, and the general assessment base for the calendar year in which the annual assessment base is calculated.

Personal assessment base is a monthly average calculated from the sum of the annual assessment bases. When determining the personal assessment base, some legally defined periods are excluded from the decisive period used to determine the income for the purposes of pension calculation, the so-called excluded periods (essentially they are non-contributory periods in the course of the decisive period and some other periods, specifically listed in the Act on pension insurance), so that the base is not “diffused”.

Calculation base shall be determined by a reduction of the personal assessment base. First reduction limit is 44 % of average wage - the amount of personal assessment base was included in fully. Second reduction limit is 4 times average wage – between first and second limit is included at 26 %. The amount of assesment base above second limit is not taking into account.¹⁾

The state guarantees the system economically, as well as legally:

• the system is administered by a state institution (Czech Social Security Administration); receipts and expenses of the system are a part of the state budget, in which a special account for pension insurance has been introduced and in 2008 transformed into a Special account of the reserve for a pension reform,
• all the benefits are claimable (the person is entitled to the benefits subject to meeting the conditions required by law); a written objection may be submitted as a regular remedy against a resolution issued by the Czech Social Security Administration about an application for a pension, within 30 days after the resolution is delivered to the party to the proceedings; a legal action may be lodged against a resolution about the objection, in an appellate procedure with the competent regional court based on the applicant´s place of residence. The limit to lodge the action shall be 2 months after the resolution is delivered.

Increases of the paid-out pensions (basic rules)

• the paid-out pensions are increased regularly every year in January; a different procedure is established only in case of a very low inflation (if the increase is less than 2 %) and in case of a high inflation (at least 5 %);
• the increase of the pensions is established by law so that it represents at least 100% of the price increase for the average old-age pension and also at least one third of the increase of the real wage; basic assesment (9 % of average wage) is raised according to average wage increasing and percentage assesment according consumer price index (inflation) increasing
• for regular increases, which are made January, the increase of the summary index of consumer prices for households is determined for a period of twelve months, until July of the calendar year preceding that in which the pensions are increased;
• pensions may be increased by means of extraordinary increases, as long as the growth of prices in the monitored period reaches at least 5 %; in this case pensions are increased from 5th month after month in which consumer price index reached 5 % at least.

(This text is not binding juridical explanation. For detail information final version of the Act No. 155/1995 on pension insurance is recommended).