Note on the Sustainability of the Pay-As-You-Go Pension Scheme in the Context of Population Ageing in the Czech Republic

The aim of this article is to explore main linkages among the participation rate, potential output and pension funding system. Based on the existing literature, there are several possibilities how to render the current set-up of the pension system sustainable. This sustainability is conventionally regarded from the perspective of provision of "satisfactory level" of retirement pensions as well as from the perspective of general budgetary impact. In this respect, demographic change is accounted for owing to the common perception that it has a lot to do with how the future pension system should and will look like. It has been found out that if appropriate economic policy measures ‒ targeting mainly labour market participation rate and long-term unemployment ‒ are adopted, no need for abrupt changes in the existing social security system framework is actually necessary. Also, the linkages between the participation rate and potential output seem to be relatively strong, so that the economy could be easily considered as signifi cantly influenced by its labour market. The functioning of the latter thus seems to be pivotal for the resolution of some long-term economic capacity concerns, including its dynamics.

Keywords: labour market, pension reform, potential output, population ageing, labour force participation rate, social security system