Slovakia's long-term public pension spending outlook hinges on the success of its funded pillar II pension system, according to the OECD.

In its latest Economic Survey of the Slovak Republic, the OECD said reforms that came into force in 2023 have the potential to keep public pension expenditure in check, with two measures significantly reducing future spending needs.

The first was relinking the statutory retirement age to life expectancy from 2030, and the second was indexing the pension point to 95 per cent of average wage growth, down from 100 per cent.

Together with higher employment and updated demographic and economic assumptions, the reforms reduced the projected increase in public pension expenditure from 5.9 per cent of GDP between 2019 and 2070, as estimated in the 2021 Ageing Report, to 2.8 per cent of GDP between 2022 and 2070 in the 2024 report.

The OECD said public pillar I pension spending is expected to decline relative to GDP after 2060 as funded pillar II pensions become “increasingly important”.
However, it warned that the improved long-term public pension outlook comes with risks.

The OECD said the long-term stabilisation and decline of pension spending relative to GDP "hinges on the success of funded pillar II pensions".

It noted that, following the 2023 reform and after a transition period, fees are capped at 0.4 per cent of fund assets, compared with an average of 0.7 per cent across OECD countries with pillar II pension systems.

The report said the fee cap should support future pension income, as fees have long been recognised as a “dominant driver” of negative effects on fund performance.

The OECD also pointed to recent changes that relaxed investment restrictions, allowing greater investment in Slovak-based assets.

While these changes could improve investment performance, it said their effects should be monitored to ensure risks remain well managed.

The report also highlighted a number of policy risks that could weaken the long-term outlook.

It said the exceptional €300 pension payment made in 2023 may have created expectations that similar measures could be repeated during future periods of high inflation or economic difficulty, potentially undermining confidence in the long-term sustainability of the pension system.

In addition, the OECD suggested that reverting the increase in the 13th pension for middle and higher-income pensioners could generate long-term savings of around 0.3 per cent of GDP.

It also questioned whether provisions allowing mothers to retire earlier and pension bonuses for parents are likely to achieve their stated objective of boosting fertility, noting there is little empirical evidence that such pension incentives influence family planning decisions.

---