Incidence Analysis of Pension Security in the Czech Republic

We examine who and how much benefits from the pension security in the Czech Republic and what impact this public insurance scheme has on income inequality over a lifetime. Since there is no suitable Czech panel data we modelled pseudo-panel data on lifetime earnings of employees on the basis of cross-sectional data. Present values of lifetime contributions paid to and lifetime pensions received from the scheme were derived from the pseudo-panel data. The analysis revealed that the higher well-being the smaller ratio of the present value of the lifetime pension to the present value of the lifetime contribution to the pension security. Moreover, if considering the total contribution including also employers' share the ratio for most of men and richer women is less than one. The pension security thus redistributes means between participants. Further measurement with the Gini coefficient confirmed that the scheme reduces income inequality. Our analysis proved that the solidarity principle built in the pension formula prevails over the benefit principle, which is also present in the formula, even when the benefit principle is relatively more favourable for the rich employees because of the shape of the lifetime earnings function. This paper presents results of the research projects No 402/07/0823 (Incidence analysis of public budgets in the Czech Republic) and No 402/09/0283 (Public expenditure in postsocialist member states of the European Union) which were financially supported by the Czech Science Foundation.