Final Word from Monday, February 21, 2011

Without a tax break or other incentive, why would Czechs commit now to entrusting 2% of their salary to a private pension fund every month for as long as 50 years without the ability to withdraw early or to borrow against the savings? The risks will seem too high for most people. Unless, perhaps, there is a Harvard moment. Viktor Kožený of Harvard Capital won over skeptical Czechs by promising them Kč 10,000 for their coupon-privatization booklets. Depending on how the issues of the future retirement age, the management fees of pension funds, and the inheritance rights to the residual 2% personal contribution and 3% "state" contribution are resolved, it might be very attractive for pension funds to boost participation by giving some sort of sign-up bonus. The risk, of course, is that the higher the bonus, the more Czechs will suspect that pension reform is another Harvard-like scam.

Glossary of difficult words

incentive - a thing that motivates or encourages someone to do something;

2% of salary - this figure is not precise (due to the way taxes and pension contributions are calculated) and is used for simplification;

to win someone over - to gain the support of someone by action or persuasion;

3% "state" contribution - it is not entirely clear who, in the event of death, will keep the 3% amount that is diverted from the state pension system into the private system;

residual - left over (after the insured person dies);

scam - a dishonest scheme; a fraud.


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