2010/03/23 - Pl. ÚS 8/07: Right to Adequate Material Security

23 March 2010

HEADNOTES

A defining

element of social rights is the fact that they are not unconditional in

nature, and can be exercised only within the bounds of the laws (Art. 41

par. 1 of the Charter). This provision gives the legislature the right

to set specific conditions for implementing social rights. The statutory

implementation may not conflict with constitutional principles; in

other words, the statutes may not deny or annul constitutionally

guaranteed social rights. In implementing the constitutional framework

enshrined in the Charter, the legislature must be governed by Art. 4

par. 4 of the Charter, under which, in employing the provisions

concerning limitations upon the fundamental rights and basic freedoms,

the essence and significance of these rights and freedoms must be

preserved.

 

The

Charter of Fundamental Rights and Freedoms guarantees all participants

of pension insurance adequate material security. Adequacy

[proportionality] must be understood as an indefinite legal concept. The

proportionality of material security in relation to individual

participants in pension insurance must be understood in relation to

satisfying an individual’s living needs, in relation to the widest

possible circle of persons, but also in relation to the insured person

as a payer who co-creates the financial resources from which the

material security will be provided.

 

The

pension system is an instrument of state social policy, through which

the (basic) functions of social policy are fulfilled, i.e. the functions

of protection, distribution and redistribution and the stimulation. In

all existing social security systems the principles of solidarity and

equivalence are represented in varying degrees. Every system of social

security carries advantages or disadvantages for certain social groups,

depending on whether it gives preference to the viewpoint of solidarity

or the equivalence principle. This regulation is reserved to the

legislature, which cannot act arbitrarily.

 

The

Constitutional Court interprets in its case law the constitutional

principle of equality in terms of accessory and non-accessory equality.

Thus, a particular legal framework that gives an advantage to one group

or category of persons over others may not, without anything further, be

described as violation of the principle of equality. The legislature

has a certain discretion to deliberate whether to establish such

preferential treatment. It must see to it that the approach that grants

an advantage is based on objective and reasonable grounds (a legitimate

legislative aim) and that there is a proportional relationship between

that aim and the means used to achieve it.

 

It

is the obligation of the legislature to transparently express the ratio

of the components of solidarity and equivalence in the social insurance

system (including pension insurance); it also stated that this division

may not be arbitrary. In the opposite case, i.e. in the absence of the

element of equivalence, the reviewed institution would lose its legal

nature, it would cease to be insurance, and acquire the character of a

tax. Thus, the Charter gives rise to a fundamental right for the insured

person to a component of equivalence in public health insurance

transparently determined by the legislature, and in such an extent as

preserves the nature of the legal institution of insurance and does not

change it into a tax.

 

Constitutional

review of the proportionality connection between income level, pension

insurance contribution and pension level includes evaluating the

observance of safeguards arising from the constitutional principle of

equality, both non-accessory (Art. 1 of the Charter), i.e., arising from

the requirement of ruling out arbitrariness when distinguishing

subjects and rights, and accessory, in the scope defined in Art. 3 par. 1

of the Charter.

 

The

legal framework implemented by the contested § 15 of Act no. 155/1995

Coll. (in particularly establishing reduction limits) creates a

situation where a participant in the pension system who contributes

three times more than a participant who contributes an amount calculated

from an average wage is allocated a pension of – relatively – less than

half. Yet, statistical date show that ca. 30% of insured parties, in

the calculation of pension benefits, will cross the second reduction

limit (ca. 95% of insured persons cross the first reduction limit).

Thus, it is evident that the legal framework, in the attempt to ensure

adequate material security to all participants in pension insurance,

does not ensure for some insured persons a proportionate material

security that reflects, in a recognizable degree, the principle of a

merit basis, i.e. fulfilling the stimulation function of social policy.

 

The

construction in § 15 of Act no. 155/1995 Coll., establishing two

reduction limits at the present levels, given the existence of a system

of contributions to pension insurance without an effective “ceiling,”

establishes marked disproportionality between the level of contributions

to the insurance system, income levels, and the level of allocated

pension benefits for some insured persons, whereby it violates Art. 1

and Art. 3 par. 1 of the Charter.

 

The

criterion for constitutionality is the “proportionality” of the

consequences of the selected calculation, where on the one hand the

limiting corrective for the merit principle is the imperative of

(accessory and non-accessory) equality, and on the other hand that

corrective is the “proportionality” of minimum material security, not

only in the sense of eliminating poverty, but also securing a dignified

living standard for low-income insured persons.
 
Given the

existence of a range of pension systems and methods for calculating

pension benefits, it is necessary to choose an alternative that will

reflect all the principles of social policy, as well as a system of

pension insurance that will thoroughly respect constitutional principles

and meet Art. 30 par. 1, Art. 1 and Art. 3 par. 1 of the Charter, and

at the same time, preserve the essence of these fundamental rights under

Art. 4 par. 4 of the Charter.

 


CZECH REPUBLIC 

CONSTITUTIONAL COURT 

JUDGMENT

 

IN THE NAME OF THE REPUBLIC


The

Plenum of the Constitutional Court, consisting of Stanislav Balík,

František Duchoň, Vlasta Formánková, Vojen Güttler, Pavel Holländer,

Ivana Janů, Vladimír Kůrka, Dagmar Lastovecká (judge rapporteur), Jiří

Mucha, Jan Musil, Jiří Nykodým, Pavel Rychetský, Miloslav Výborný,

Eliška Wagnerová and Michaela Židlická, decided, without a hearing, with

the consent of the parties, in the matter of a petition from the

Regional Court in Ostrava, represented by judge JUDr. Bohuslava

Drahošová, seeking the annulment of § 15 of Act no. 155/1995 Coll., on

Pension Insurance, with the participation of the Chamber of Deputies of

the Parliament of the Czech Republic and the Senate of the Parliament of

the Czech Republic, as parties to the proceedings, as follows:
 

The provision of § 15 of Act no. 155/1995 Coll., on Pension Insurance, is annulled as of 30 September 2011.
 

 

 
 
REASONING
 

I.
Recapitulation of the Petition and the Petitioner’s Arguments


1.

On 13 April 2007 the Constitutional Court received a petition in which

the Regional Court in Ostrava (the “petitioner” or the “Regional

Court”), in accordance with Art. 95 par. 2 of the Constitution of the

Czech Republic (the “Constitution”) sought the annulment of part of §

15, second sentence, of Act no. 155/1995 Coll., on Pension Insurance, in

the version in effect on 29 May 2006, expressed by the words “to CZK

21,800” and the words “and from the amount of the personal assessment

base over CZK 21,800, 10% is counted”; the petitioner proposed as an

alternative the annulment of § 15 of Act no. 155/1995 Coll., on Pension

Insurance, as amended by later regulations.
 
2. In the petition

to open proceedings the petitioner stated that, in the matter of K. S., a

decision of 29 May 2006 (number 480 506 088) the plaintiff was granted,

as of 1 February 2006, a full disability pension under § 39 par. l let.

a) of Act no. 155/1995 Coll., in the amount of CZK 13,346 per month,

with the reasoning that the pension consists of a basic assessment

element of CZK1,470 per month and a percentage assessment element of CZK

11,876. This percentage assessment was calculated from the personal

assessment base, determined for the years 1986 to 2005 in the amount of

CZK 68,635Kč.
 
3. The plaintiff contested the amount of the

pension granted before the Regional Court in Ostrava, knowing that the

amount was set in accordance with § 15 et seq. and § 41 of Act no.

155/1995 Coll., and pointed to the fact that the total amount of his

pension is only 19% of his income (which he does not consider to be

adequate material security). As the average level of pension in 2004 was

44% of average gross income (or. 57% of average net income), the

plaintiff believed that the pension granted to him established absolute

inequality between him and other beneficiaries of the pension system. In

the complaint filed with the Regional Court the petitioner alleged that

§ 15 of Act no. 155/1995 Coll. was inconsistent with Art. 30 par. 1 of

the Charter of Fundamental Rights and Freedoms (the “Charter”), because

the reduction in income for calculating the pension percentage

assessment element set forth in that provision disadvantages him and

places him in an unequal position.
 
4. The petitioner considers

the decision contested before the Regional Court to be correct, as far

as the method of calculation of pension and recording of years worked is

concerned. Nonetheless, the petitioner concluded that § 15 of the

Pension Insurance Act cannot stand, as it is unconstitutional, because

this provision damages insured parties with higher incomes, i.e. those

persons whose income exceeds the basic set amount of the personal

assessment base. Moreover, no maximum limit has been set for the

assessment base for employees, unlike for self-employed persons.
 
5.

The petitioner points out that the name of the Act indicates that it

involves insurance, i.e. a legal institution that has its settled

content in every law-based state. The insured party transfers his risk,

for payment, to another entity, which accepts the risk and, in a certain

situation, is bound to provide the specified performance. Therefore,

the contributions paid must be treated like insurance premiums, not like

taxes. According to the petitioner, as regards the contributions, the

relationship between the contributions paid and the performance should

be clear and proportionate. The petitioner emphasizes that applying, in

particular, the second reduction limit, leads to a substantial decrease

in the calculation base, without any apparent deliberation by the

legislature about the legitimate aim and purpose of that legal

framework. The de facto result of applying the specified reductions is

that the higher the amount of insurance premiums paid, the lower,

relatively, the pension paid out.
 
6. According to the

petitioner, the contested § 15 of Act no. 155/1995 Coll. is not a

provision that removes inequalities, but, on the contrary, one that

obviously establishes flagrant inequality between insured persons. Under

no circumstances can it be consider to create a proportionate

relationship. Therefore, in the petitioner’s opinion, it is necessary to

review whether the grounds for such steps are objective, and whether

the means used are proportionate (appropriate). The petitioner believes

that one cannot overlook that the criterion of the appropriateness of

the means chosen (the reduction level) is completely absent from this

legal framework, and the provided reduction limits and percentages bear

the marks of pure legislative arbitrariness. The reduction should be the

same for all insured persons; a law-based state cannot declare itself

to be an insurance provider and at the same distribute the funds

collected in such a manner that it often does not guarantee those who

contributed most to the system even 20% of their original monthly

income, from which the insurance was collected.
 
7. The

petitioner also states that the principle of solidarity is not a

specific legal institution that would give rise to certain rights and

obligations. Solidarity means a feeling of belonging to a certain whole,

cohesion, community, a willingness for mutual assistance and support.

It is undoubtedly a completely acceptable ethical principle that,

however, is not in and of itself sufficient for the justification and

acceptance of the abovementioned differential treatment. Solidarity is

expressed adequately and markedly in the fact that insurance payments

are consistently based on the level of pay. The system also adequately

ensures general inter-generational solidarity, and even goes so far as

to require that those who can basically not expect any new performance

from it (working retirees) also contribute to it.
 
8. In the

conclusion of the petition, the petitioner states that, in its opinion, §

15 of Act no. 155/1995 Coll., on Pension Insurance, is inconsistent

with Article 1 par. 1 of the Constitution and with Article 1 of the

Charter, because it discriminates against a considerable group of the

insured persons in an obviously disproportionate manner.

 


II.
Briefs from the Parties to the Proceeding


9.

In accordance with § 42 par. 3, 4 and § 69 of Act no. 182/1993 Coll.,

on the Constitutional Court, as amended by later regulations, the

Constitutional Court sent the petition to the Chamber of Deputies and

the Senate of the Parliament of the Czech Republic for their responses,

and also requested a written statement from the Ministry of Labor and

Social Affairs (under § 48 par. 1, 2 of the Act on the Constitutional

Court).
 
10. In its brief, the Chamber of Deputies of the

Parliament of the Czech Republic first pointed to the fact that, during

the legislative process in the lower house, no substantive objections

were raised to § 15 of Act no. 155/1995 Coll. On 29 June 1995, during

general debate on Chamber of Deputies publication no. 1574, two amending

proposals were made (by Dalibor Štambera and Jaroslav Štrait)

concerning the wording of § 15, both of which concerned only the level

of individual reduction limits, not their percentages. Chamber of

Deputies publication no. 1574 was then approved together with the

amending proposal of Deputy Dalibor Štambera. In the conclusion of its

statement the Chamber of Deputies states that Act no. 155/1995 Coll. was

adopted after a properly conducted legislative process, was signed by

the appropriate constitutional authorities, and promulgated in the

Collection of Laws.
 
11. In its brief, the Senate of the

Parliament of the Czech Republic pointed out that Act no. 155/1995 Coll.

was adopted by the Chamber of Deputies before the Senate was

constituted, but pointed to the fact that the Act has been amended many

times (almost forty amendments), but no amendment concerned the

contested § 15. Concerning the petitioners objection that “for

employees, unlike self-employed persons, no maximum limit for the

assessment base is provided,” the Senate pointed out that after the

petition was filed, Act no. 261/2007 Coll., on Stabilization of the

State Budget, with effect as of 1 January 2008, a maximum limit for the

insurance base was set (also) for employees in § 15a of Act no. 589/1992

Coll., on Contributions to Social Security and Contributions to State

Employment Policy.
 


III.
Brief from the Ministry of Labor and Social Affairs


12.

In the opening of its extensive brief the Ministry emphasized that the

calculation base in the Pension Insurance Act is a key element, without

which the Act is basically inapplicable. Two elements are essential for

setting the calculation base, the personal assessment base and the

reduction limit. The government sets the reduction limit by a decree

based on § 107 par. 2 of the Pension Insurance Act; the Act does not

require increases in these limits (“the government may increase”), not

does it set any limiting conditions for setting them. According to the

Ministry, the existence of the reduction limits and their level at which

they are set cannot be reviewed without taking into account all the

circumstances and connections to other elements of the construction for

the calculation of pensions, i.e., in particular, the indexation of the

assessment bases actually reached in the decisive period, from which

income for calculation of pensions is determined.
 
13. The

Ministry also recapitulated the historical developments and pointed out

that reduction limits were not introduced in Czech pension insurance for

the first time by the Pension Insurance Act, but existed almost 50

years before the Act went into effect, beginning with Act no. 99/1948

Coll. of Laws and Directives, on National Insurance. Therefore, it must

be noted that the legal regulation from 1995 for the first time removes

one of the previous limiting measures, consisting of the fact that

income above a certain level was basically not taken into account at

all. In this regard, the Ministry emphasizes that the legal regulations

in effect before 1 January 1996 contained a number of other limitations

on pension levels, both through a fixed amount and through the highest

percentage assessment, which the Pension Insurance Act did not adopt.

Therefore, according to the Ministry, the existence of reduction limits

is the only “limiting” element in the present system of calculating

pensions.
 
14. In its brief, the Ministry also made international

comparisons, where it pointed both to countries with a high level of

correspondence between allocated pensions and income before retirement

(e.g., Italy, Finland, the Netherlands, Estonia and Croatia) and to

countries with a low level of correspondence (e.g., Great Britain,

Ireland, Denmark, Belgium, Switzerland).
 
15. The Ministry also

paid attention to the question of the nature of pension insurance, and

pointed to the fact that social and private insurance are generally

recognized to be of a different nature. The main differences between

“social insurance” (as social systems can be called) and “commercial

insurance” (as other kinds of insurance can be called) are: a) social

insurance is established primarily by statute, whereas commercial

insurance arises based on contract; b) social insurance is basically

mandatory under conditions set forth by law, while commercial insurance

is primarily voluntary; c) performance in social insurance is determined

by parameters (not individually) by statute (often a different statute

than the one that sets the rules for payment of contributions), while

insurance performance in commercial insurance is determined in a

particular individual contract, or at least follows from it; d) payments

of contributions in social insurance are made not only by the insured

persons but also by their employers; e) performance by the state

(through payers of pensions) generally is not dependent on payment of

contributions, because insured persons who are participants in pension

insurance through employment are payers of these contributions, but not

the “de facto payers,”; f) a number of social and protective elements

are applied in social insurance that markedly modify the relationship

between the income achieved (contributions paid) and the level of

benefit payments and the conditions for entitlement to payments

(pensions); this involves, in particular, the institutions of

replacement insurance periods (when no premiums are paid), excluded

periods in the calculation of the personal assessment base, supplemental

periods for entitlement to disability pensions and the guaranteed

minimum level of pensions. For these reasons, the Ministry concludes

that it cannot agree with the claim that contributions paid must be

treated as insurance premiums, and not as taxes. Payment of

contributions [or insurance premiums] has a completely different

significance and effect in social insurance than in commercial

insurance.
 
16. In the next part of its brief, the Ministry

considered the principle of solidarity. As regards “inter-generational”

solidarity, the Ministry states that, although the retirement age has

been raised in recent years, and has reached approximately the rate of

increase in life expectancy, nevertheless, every year more old-age

pensions are paid out, which affects the expenditures for pension

insurance. Thus, the amount paid out for old-age pensions in recent

years grew faster than the number of old-age pensions. As regards

solidarity within a (given) generation, the Ministry states that

solidarity of economically active citizens with the economically

non-active ones is manifested primarily through replacement insurance

periods. These are periods that are taken into account for purposes of

pension insurance even though no contributions or any other payments are

made for them. Related to replacement insurance periods are “excluded

periods”; these are basically replacement insurance periods that fall

within the decisive period, from which income is determined for purposes

of calculating pensions.
 
17. According to the Ministry, an

important element of solidarity within a generation is “income

solidarity,” which leads to a higher level of replacement of

pre-retirement income for persons with long-term low income, with the

provision that the replacement level decreases as income increases.

Applying the principle of solidarity in pension insurance makes it

possible to prevent the social exclusion of certain groups of citizens

and their being threatened by poverty. In this regard the Ministry

emphasizes that, in view of the general income level in the Czech

Republic, and in view of the aims of preventing social exclusion,

maintaining pensioners’ standard of living and supporting solidarity

within a generation and between generations, the situation of pensioners

is adequate [proportionate]. The Czech Republic is among countries that

have very low levels of poverty.
 
18. Income solidarity is

manifested in the entire construction of pension calculation. Income

levels for calculation of pensions are not determined for the entire

period of economic activity, but only from a certain part, not including

the period at the beginning, when incomes are usually lower. Another

expression of solidarity is the fact that, for calculating the

percentage assessment element of a pension, actual assessment bases

(gross income) achieved, from which contributions were paid, are not

used, but instead “annual calculation bases” are used, basically the

actual calculation bases achieved multiplied by a coefficient of the

growth of the general assessment base; this ensures that the level of

income achieved in a particular calendar year in the decisive period in

relation to the year when a pension is allocated is maintained.
 
19.

According to the Ministry, an important expression of solidarity within

the calculation of pensions are precisely these reduction limits, which

are used to determine, from the personal assessment base, the

calculation base for setting the percentage assessment element of a

pension. The Ministry also points out that basic pension insurance plays

an important role in reducing the poverty of the older generation,

which is also one of its fundamental aims. Annulling the reduction

limits would considerably worsen this present situation, because the

reduction limits are an element that fundamentally affects the level of

solidarity in basic pension insurance. With reference to the

Constitutional Court’s judgment file no. Pl. ÚS 12/94, the Ministry

concludes that it is up to the legislature whether the pension system

gives priority to equivalence or solidarity.
 
20. In the next

part of its brief, the Ministry addressed the question of the

replacement ratio, and pointed out that decreasing the replacement ratio

was not among the so-called stabilization measures. Therefore, the

question of increasing this ratio must also be reviewed in view of the

overall future development of the balance of the pension system. In

every country the replacement ratio depends on a number of factors.

These are the balance of income and expenses of the pension system

(including prognoses), rates of contributions for pension insurance, the

overall level of the tax and withholding burden on the population and

employers, the extent of support for supplemental pension systems, the

historic development of the pension system, the number of insured

persons and the circle of payers of pension insurance contributions, the

importance of pension insurance income for the financial security of

the population, and the overall role of the pension system in society

(including the degree of solidarity). In view of these factors, the

Ministry concludes that in the Czech Republic the existing structure of

the level of pensions and the replacement ratio correspond to the

socio-economic and political reality, and that they are not an

expression of “pure arbitrariness by the legislature,” which simply does

not want to provide higher pensions to groups of insured persons with

higher incomes.
 
21. Thus, according to the Ministry, reducing

the calculation base through reduction limits, i.e., calculating

pensions not from the one hundred percent average of income determined

for the decisive period, but from a reduced average, comes from the

overall concept of the Czech pension system, which is based on a wider

understanding of solidarity in the system, and the mutual

interconnection and balancing of individual elements of the system, in

particular the scope of including individual replacement periods, the

manner of determining average income for the decisive period (including

indexation and reduction), a percentage (1.5%) of the calculation basis

for each year of the insurance period, age at retirement, and the

institution of a supplemental period. It must also be emphasized that

the extent of solidarity in the pension system is recognized throughout

society, and is also requested by the majority of the society, and that

any marked limitation of this solidarity would be seen negatively by the

majority of society.
 
22. In the conclusion of its brief the

Ministry addresses the question of annulling the first and second

reduction limit. According to the Ministry, annulling both reduction

limits for reduction of the personal assessment base when calculating a

pension under § 15 of the Pension Insurance Act would immediately be

reflected in the level of newly allocated pensions, in a jump in their

average relative level vis-à-vis wages, from the present ca. 45% to

almost 80%. Annulling reduction limits would be reflected gradual in the

overall level of pensions, because it will affect only newly allocated

pensions. Nonetheless, long-term the average level of old-age pensions

paid out would increase (measured by the ratio of the average old-age

pension to the average wage) to almost 65% of the average wage). This

fact would have a negative effect on the total expenditures for pensions

and the sustainability of the entire system.
 
23. According to

the Ministry, annulling the second reduction limit for reducing the

personal assessment base for calculating pensions under § 15 of the

Pension Insurance Act would be reflected in the level of newly allocated

pensions; nonetheless, this increase would change the average relative

level of these pensions vis-à-vis wages by only ca. 5%, from the present

45% to something over 47%. The relatively small increase in the level

of newly allocated pensions is given by the fact that fewer than 30% of

person to whom a pension is allocated have a personal assessment base

above the second reduction limit, and the shift is only from 10% to 30%.

If the reduction limits were fundamentally changed or annulled, it

would be necessary to analyze the level of all other elements in the

structure for calculating pensions, the percentages for the period of

insurance until reaching retirement age, and in the period after

reaching retirement age and the reduction of the percentage assessment

element or pensions for early retirement. It would also be necessary to

reevaluate the position, or level of inclusion of “replacement periods”

of insurance that are taken into account for purposes of pension

insurance even though no contributions or other payments are made during

them.
 
24. Canceling the reduction limits for reducing the

personal measurement basis for calculation of pensions would be

reflected in the level of newly allocated pension by raising the pension

calculated from the personal measurement basis in excess of the

reduction limits, and if it were not connected with changes of other

parameters influencing the level of pension, it would thus lead to

increasing the expenditures for pensions. Changes in the reduction

limits would establish inequality between individual groups of insured

persons, because they would affect only the pensions allocated when

these changes were in effect, and from an economic viewpoint it would

not be realistic to remove these inequalities. The consequence of

annulling § 15 of the Pension Insurance Act would be that it would not

be possible to allocate pensions, or all direct pensions would be

allocated only at the minimum guaranteed level, because this would

cancel the definition of a key element for calculating the percentage

assessment element of pensions (and § 16 to 18 would thus become

practically inapplicable, and so obsolete), and adopting a new framework

would be very difficult, and a certain reduction would have to be

adopted again anyway, because otherwise the replacement ratio (the ratio

of the pension to net wages) would be more than 90% (91 to 97%), which

is financially completely unrealistic.
 
25. In addition, the

Ministry points out that the actual wording of § 15 of the Pension

Insurance Act is not an obstacle to raising the reduction limits so that

the personal assessment base would be taken into account in a greater

degree for calculating pensions, because the government sets these

limits by decree, and the Pension Insurance Act does not provide any

criteria for setting the limits. However, these criteria are given in

practice by the financial possibilities of the system (including

balancing, or adjusting to balance the amount of already allocated

pensions so that there would not be differences between pensions

allocated in different periods), and by the role of reduction limits in

the concept of the Czech pension system, and therefore no marked changes

were made, or could be made, in the level of the reduction limits

(theoretically it would be possible for the government to set a second

reduction limit of, e.g., CZK 60,000).
 
26. In the conclusion of

its brief the Ministry states that the petition from the Regional Court

in Ostrava to annul the words “up to CZK 21,800” and the words “and from

the amount of the personal assessment base over CZK 21,800, 10% is

counted” in § 15, second sentence, of the Pension Insurance Act, cannot

be implemented, because these words do not appear in the current wording

of the Pension Insurance Act. The provision of § 15 of the Pension

Insurance Act still contains the amounts CZK 5,000 and CZK 10,000, and

these amounts were not changed by any other statutes; these amounts were

increased by government decree, but a government decree is not directly

an amendment of a statute. It also objects that the amount of CZK

21,800 is not valid in 2009, because for 2009 the second reduction limit

is CZK 27,000, based on government decree no. 365/2008 Coll.; even if

we accept that the government decree directly amends the Act, there is

an obstacle under § 66 par. 1 of Act no. 182/1993 Coll., on the

Constitutional Court, because the contested wording, i.e. the amount of

CZK 21,800, has already ceased to be in effect (see government decree

no. 414/2005 Coll., government decree no. 462/2006 Coll., government

decree no. 257/2007 Coll. and government decree no. 365/2008 Coll.).


IV.
The text of the contested provision


27.

The provision of § 15 of Act no. 155/1995 Coll. reads: “The calculation

base is the personal assessment base (§ 16), if it does not exceed CZK

5,000. If the personal assessment base exceeds CZK 5,000, the

calculation base is determined as follows: the amount of CZK 5,000 is

counted in full, from the amount of the personal assessment base over

CZK 5,000 to CZK 10,000 30% is counted, and from the part of the

personal assessment base over CZK 10,000 10% is counted.”
 


V.
Conditions for the petitioner’s active standing, permissibility of the petition


28.

The Regional Court in Ostrava filed the petition in connection with a

proceeding taking place before it, and the provision of the Pension

Insurance Act proposed to be annulled is one of those that the court

must apply in the proceeding. Thus, its active standing is based on § 64

par. 3 of the Act on the Constitutional Court.
 
29. The

Constitutional Court considered whether the provision cited in the

petition can become the subject of a proceeding under § 64 et seq. of

the Act on the Constitutional Court in a situation where a government

decree raised the “second reduction limit” (which the Ministry of Labor

and Social Affairs referred to in its brief).
 
30. In the first

alternative in the petition, the petitioner proposes annulment of § 15

second sentence of the Pension Insurance Act, the words “up to CZK

21,800” and the words “and from the part of the personal calculation

basis over CZK 21,800, 10% is counted.” Thus, the Constitutional Court

is asked to annul parts of a statutory provision in which Act no.

155/1995 Coll. set financial amounts that were later progressively

increased by government decrees under § 107 par. 2 of the Act.
 
31.

The Constitutional Court nonetheless had to consider the consequences

of the steps taken by the government under the cited authorization

provision, that is, the question whether, under § 67 par. 1 of the Act

on the Constitutional Court, conditions for discontinuance of

proceedings have been met, or whether the petition is admissible under §

66 par. 1 of the Act on the Constitutional Court. The petitioner made

an alternative proposal in its submission to the Constitutional Court,

and in the second alternative it proposed annulment of the (entire)

provision of § 15 of Act no. 155/1995 Coll.; therefore, the

Constitutional Court did not find that there were grounds to stop the

proceeding, and it considers the petition admissible.
 


VI.
Constitutional conformity of the legislative process


 
32.

The Constitutional Court also, in accordance with § 68 par. 2 of the

Act on the Constitutional Court, reviewed whether the statute whose

provision the petitioner considers unconstitutional was adopted and

issued within the bounds of constitutionally provided jurisdiction and

in a constitutionally prescribed manner.
 
33. The Constitutional

Court determined from the briefs from the Chamber of Deputies and the

Senate of the Parliament of the Czech Republic, as well as the relevant

Chamber of Deputies publications and voting records, that the Chamber of

Deputies approved the draft of the Pension Insurance Act at its 32nd

session on 30 June 1995, i.e. before the Senate was established. The

votes were 100 deputies in favor and 76 against. The Act was signed by

the constitutional authorities and promulgated on 4 August 1995 in the

Collection of Laws, part 41, as number 155/1995 Coll. Thus, the Pension

Insurance Act was adopted in a constitutionally prescribed manner and

within the bounds of constitutionally provided jurisdiction, observing

the rules set forth in Article 39 par. 1 and 2 of the Constitution.


 
 VII.
The Review


34.

Thus, as the narrative part of the reasoning indicates, the

Constitutional Court has the task of reviewing the constitutionality of

the contested § 15 of Act no. 155/1995 Coll., on Pension Insurance. The

subject matter for the Constitutional Court’s review is primarily the

question of whether the ratio between the level of income, pension

insurance contributions, and the level of pension under the existing

legal framework meets the constitutional requirement of

“proportionality” of material security in old age (or during incapacity

to work or loss of provider) and does not establish the claimed

inequality between participants in pension insurance. Thus, evaluating

the justification of the petition to annul § 15 cannot consist only of

evaluating the constitutionality of the actual implementation of the

right to adequate material security enshrined in Art. 30 par. 1 of the

Charter, but also in terms of meeting the principle of equality

enshrined in Art. 1 of the Charter.
 
 
Brief description of pension systems and the Czech legal framework
 
35.

The contested § 15 of Act no. 155/1995 Coll., based on which pensions

are calculated, cannot be reviewed in isolation – e.g., only through the

prism of that legal regulation – but in the wider context of the

pension system as one of the components of the state’s social policy
 
36.

The pension system is an instrument of state social policy, through

which the (basic) functions of social policy are fulfilled. Laws

governing social security, including the area of pension systems, are

generally a reflection of state social policy, which always comes from a

collection of social and economic factors. The pension system fulfills

primarily the following functions. The primary (historically oldest) is

the function of protection, the aim of which is to protect an individual

or social groups. The pension system also has functions of distribution

and redistribution, and the function of redistribution is tied to

mitigating the differences and inequalities between individuals and

social groups. Another function of social policy is the homogenization

function, which aims to mitigate social differences and unjustified

differences, but its aim is not, under any circumstances, to level

everything. The functions of social policy also include stimulation,

supporting economic policy by motivating individuals (see Gregorová,

Zdeňka: Důchodové systémy [Pension Systmes], Brno: Masarykova univerzita

[Masaryk University], 1998, pp. 45-47).
 
37. Pension systems

should ensure the provision of material security upon certain social

events. Providing material security is possible at three levels (the

so-called three pillars). The first (general) pillar is the pension

systems provided by the state, the second pillar is based on employee

(pension) systems, and the third (like the second, supplemental) pillar

rests on the principle of personal savings (so-called “supplemental

pension insurance”).
 
38. In terms of the possibilities for

financial pensions systems that are not directly financed by the state

budget, there are two basic “insurance” systems of financing – the “pay

as you go” system, and the fund system. The basic difference is that in

the pay as you go system the contributions collected from economically

active persons – insurance payers – is used to pay pensions to existing

pensioners. In a fund system the contributions paid are invested in

individual accounts for purposes of financing the future pension

entitlements of the persons who pay the premiums.
 
39. In order

to function, the pay as you go system basically requires complete

inter-generational solidarity, which means basically equal revenues and

expenditures in the pension system each year. In other words, if basic

pension insurance is based on the pay as you go system, that means that

already allocated amounts are paid out of the currently collected

contributions. Funds are not accumulated with the aim of investing them.

Thus, the economically active generation directly pays pension amounts

to the economically inactive generation. A financial balance in pay as

you go systems can be achieved only if revenues are the same as

expenditures.
 
40. In contrast, the fund system is not

characterized by such inter-generational solidarity, because it is aimed

at individualized coverage of an individual’s social risk in future

through saving his resources. The revenue of the fund system is

determined from the gross revenue from assets achieved on the financial

markets, consistent with conditions defined by the regulator and

supervision, and the level of administrative expenses.
 
41. The

fund system undoubtedly suits the general private law idea of

“insurance” much more than the pay as you go system; however, that does

not mean that the pay as you go system would fundamentally not be

considered an insurance system in the theory of social insurance. The

insurance nature basically arises from these elements: in the pay as you

go system as well the aggregate of collected premiums is intended to

cover entitlements in the system and its level has no direct effect, in

particular in defined payment systems, on the amount of the payment

made; it has at most an indirect effect, because participation in

insurance is a fundamental condition for an entitlement to future

performance from the system, and the calculation of the amount of

payments always in some manner takes into account at least the length of

time that contributions were made to the system.
 
42. In pay as

you go systems, a direct connection between the amount of contributions

paid and the level of payment received in future is not necessarily

required. If the payment received in future is always in some way

dependent on the contributions paid in the past, then it is the length

of time that contributions were paid that can be a variable in the

benefit formula partly affecting the level of benefit payments. However,

the amount of benefit payment fundamentally mostly depends on the

amount of contributions paid by the future generation. Thus, in pay as

you go systems the merit basis of the allocated payment fundamentally

cannot be derived directly from the amount of contributions paid in the

past without regard to the contributions paid by the younger generation

at the time the payment is allocated, because there would be a risk of

deficit in system financing. However, depending on the construction of

payment calculation chosen, even in a pay as you go system the degree of

equivalence between the allocated payment and previous income when a

person was economically active can be higher or lower.
 
43. In

both systems there are two basic kinds of calculation of benefit

payments in terms of the benefit payment amount being tied to the level

of previous earnings (or premiums paid). These are the defined

contribution systems and defined benefit systems. Defined benefit

systems are, by the nature of the matter, more typical of pay as you go

systems, and contribution systems are more typical of fund systems,

although various combinations may appear in practice.
 
44. In a

defined contribution system the contribution rate at which the insured

party pays into the system is defined. The amount of a person’s pension

depends directly proportionately on the number of contributions paid and

their valuation, and indirectly proportionately on the life expectancy

of his generation at the time the insured person retires. Thus, the

amount of pension is not “guaranteed” in advance by the system, or is

not predictable. It is obvious that this method of calculating the

payment is suitable particularly for fund systems, even though there are

also structures that implant a defined contribution system into a pay

as you go system.
 
45. In contrast, in a defined payment system

there is a precise formula for calculating pensions. After accepting

certain simplifications [the expected period of insurance, level of

income (or assessment base), etc.] an insured person should have an

approximate idea of the amount of his pension several years before

actual retirement. Of course, the credibility of the level of commitment

to a given individual is strongly conditioned on the assumption that

the key parameters of the pension system will not change in time.
 
46.

The structure that makes payments dependent on previous payment of

premiums is, among other things, an important factor influencing the

labor market and employment, which comes to the forefront in connection

with the long-term unsustainability of pension systems in one of the

pure forms, and the present structure of parameters. Pension systems

should not provide incentives for people to leave the labor market

early. In both systems, staying in the labor market longer and having a

longer insurance period ensure a fundamentally higher pension, which

helps limit the risk of poverty in the post-productive age. However, the

degree of influence on the behavior of individuals in the labor market

is different in the two systems. Defined contribution systems are, in

their pure form, mathematically neutral. In other words, the insurance

premiums paid for an additional year in the labor market is fully

reflected in the level of pension. Thus, a pure defined contribution

system does not give an individual an incentive to leave the labor

market early, nor does it “punish” him for retiring later. In a defined

benefit system it is, in practice, virtually impossible to achieve this

neutrality. The system gives advantages, or, on the contrary,

“penalizes” various generations, sexes, or income groups in relation to

their decisions to stay in the labor market, and it is thus possible to

give an individual greater incentives to stay in the labor market

longer.
 
47. On the other hand, however, both systems differ in

the degree of merit basis in the opposite ratio to advantageousness.

Defined contribution systems are, in their pure forms, also fully merit

based, i.e. a pension depends completely on a given individual’s income

(or contributions paid). Thus, they provide all insured persons the same

degree of replacement of their pre-retirement income, regardless of the

absolute level of that income. In contrast, defined payment systems

generally contain a hidden inter-generational income solidarity. The

degree of replacement of pre-retirement income is thus relatively higher

for persons with lower income than for those with high earnings. A

system with high income solidarity (i.e., typically, a defined payment

system) is supposed to be an instrument for reducing the poverty of

post-productive generations, but excessive income solidarity creates

obstacles in the pension system. Contribution payments are perceived

more like a tax, so the motivation to pay into the system decreases,

which, in they end, supports the gray economy. A fully merit based

system does not create negative incentives in the labor market, but in

its pure form there is a risk that some pensioners will have inadequate

pensions. The income of people in these risky categories must then be

supported by other social systems.
 
48. Both in terms of

financing, and in terms of the benefit calculation, each system has its

advantages and disadvantages. A defined payment system permits ensuring

the necessary solidarity, but if its weight in the pension system is too

great, it can have negative effects on individuals’ motivation to stay

in the labor market. In contrast, the defined contribution system does

not affect the labor market, but can also lead to poverty in part of the

population. Pay as you go financing is vulnerable to demographic

changes and is sometimes politically misused to create

inter-generational unfairness. In contrast, fund financing is sensitive

to developments on the financial markets, the quality of regulation, and

the level of administrative expenses.
 
 
The present Czech pension insurance system
 
49.

The present Czech pension insurance system is a two-pillar system; the

first pillar is the basic system, and the second (third, in terms of

general theory) pillar is statutory voluntary supplemental pension

insurance with a state contribution. The first pillar of the system is

general (it applies to the entire population), uniform (it should not

establish unjustified differences), mandatory (it imposes an obligation

to participate financially in the creation of resources) and

demonstrates social solidarity. The structure of benefit payments from

the pension system is built on the following principles, which the legal

framework must respect: merit basis, social need, security, guarantee

and initiation, replacement and social integration, preserving acquired

rights, indexation and removal of harshness (see Gregorová, Zdeňka:

Důchodové systémy [Pension Systems], Brno: Masarykova univerzita

[Masaryk University], 1998,pp. 80-85).
 
50. A pension consists of

two components, the basic assessment set as a fixed amount for all

kinds of pensions regardless of the period of insurance and level of

income, and a percentage assessment reflecting the insured person’s

previous earnings. Old-age pensions (full disability and partial

disability pensions) are calculated using the relevant percentage based

on the acquired length of pension insurance from the calculation base.

Two elements are fundamental for setting the calculation base, the

personal assessment base, and the reduction limit. When setting the

calculation base one starts with the personal assessment base, i.e. the

aggregate of the insured person’s assessment bases in individual years

in the decisive period, which are then, using the coefficient for the

growth of the general assessment base, adjusted to the wage level

achieved in the year before the year when the pension is allocated. The

aggregate of the insured person’s assessment bases for the calendar

year, multiplied by the relevant coefficient of the growth of the

general assessment base, yields the insured person’s annual assessment

basis, and the monthly average of these annual assessment bases for the

decisive period yields the personal assessment base. Reduction of the

personal assessment base then gives the calculation base for calculating

the percentage assessment of the pension.
 
51. In terms of

financing, the Czech pension insurance system can be described as a pure

system financed on a pay as you go basis, with defined payments. Thus,

it is a system that required a high degree of inter-generational and

intra-generational solidarity in order to function; the

intra-generational solidarity also depends on demographic trends, and

thus the increase in the number of pensioners compared to economically

active persons, also an indirect manifestation of inter-generational

solidarity, because it is constantly tied to the need for financial

balance.
 
52. The allocated pension benefit is calculated as

follows: first, the annual assessment bases are multiplied by the

coefficient of growth of the general assessment base to determine the

indexed annual assessment bases and the aggregate of them. At the same

time, excluded periods are added up. The personal assessment base is

then calculated by multiplying the aggregate of annual assessment bases

for the decisive period by the coefficient under § 16 par. 1 of Act no.

155/1995 Coll., and the result is divided by the number of days in the

decisive period (from which excluded periods are subtracted).
 
The

calculation base is the personal assessment base, not exceeding a set

amount that is included in full, and which, if exceeded, is reduced,

first by 30%, and if the second reduction limit is exceeded, only 10% of

the personal assessment base is counted.
 
53. On the basis of

this system, on the basis of its principles, reflection of those

principles in the legal framework, as well as the manner of financing

the system, the Constitutional Court reviewed whether Act no. 155/1995

Coll., or the contested § 15, fulfills Art. 30 par. 1 of the Charter,

which provides that “citizens have the right to adequate material

security in old age and during periods of work incapacity, as well as in

the case of the loss of their provider.” The Charter provides the

fundamental parameters that define the social guarantees for dignified

human existence. The aim of contemporary social security in the most

general sense of the word is to regulate the citizen’s responsibility

for his future (mandatory insurance systems) and to set the degree and

form of social solidarity between citizens (mandatory or voluntary

transfer of funds through the tax system or sponsorship); see Klíma,

Karel and collective of authors: Komentář k Ústavě a Listině, 2. vydání

[Commentary on the Constitution and the Charter, 2nd ed.], Plzeň: Aleš

Čeněk, Plzeň 2009, p. 1234.
 
54. The statutory framework, based

on general principles, attempts to ensure adequate material security for

all participants in pension insurance, with the maximum emphasis on the

principle of solidarity, both inter-generational and intra-generational

(i.e. income). The Constitutional Court addressed the concept of

solidarity in judgment file no. Pl. ÚS 2/08: “The degree of recognition

of the solidarity principle depends on the level of ethical

understanding of cohabitation in society, its level of sophistication,

but also the individual’s feeling for justice and cohesiveness with

others and sharing their destiny in a particular place and time. From

the individual’s viewpoint, solidarity can be seen as internal or

external. Internal solidarity comes from the emotional closeness of a

relationship to others; it is spontaneous, and exists primarily in the

family and other social partnerships. The state generally does not

interfere in this relationship, or only to a very limited extent (see

family law relationships regulated by the Act on the Family). External

solidarity lacks this emotional closeness, and therefore the individual

is more reluctant to consent to apply it. This includes, for example,

solidarity of the rich with the poor, the capable with the less capable,

the healthy with the ill. In this area the state exercises its

sovereign-power function very actively. Redistribution, i.e.

transferring resources from one group to another – the needy group – is

exercised through the solidarity principle. Solidarity has its limits.

It cannot be so extreme that those whom it affects would feel it to be

disproportionate or even unjust, and withdraw their tacit consent. The

state may, in the name of solidarity, affect only such part of the

property of a capable person as will not at the same time destroy the

person’s activity and go beyond the constitutional limit of protection

of property.”
 
55. The Constitutional Court does not in any way

question the principle of inter-generational solidarity in relation to

the pension system, because the system is, as a pay as you go system,

built on that principle. Nonetheless, we must review income solidarity

(intra-generational), reflected in the single percentage rate for

premiums paid by economically active persons; high-income groups of the

population thus pay into the system each year for payments of pension

benefits considerably higher amounts than low-income groups. The

principle of income solidarity is manifested in the fact that, in the

construction for the calculation of pensions under the current legal

framework, the pension system does not provide all insured persons

equivalent performance, because – as stated above – it fulfills, among

other things, the protective and redistributive function of social

policy.
 
56. However, in implementing this protective and

redistributive function of social policy, the legislature, when

constructing the pension system, or constructing the calculation of

pension benefits, should not repress other essential functions of social

policy, including the stimulation function, which should affect the

economic behavior of insured persons in a desirable manner, and as a

result lead to an increase in the total revenues of the system.
 
 
The pension system as a public insurance system
 
57.

The Czech Republic first addressed construction of public social

insurance as a basic system of insurance for old age, disability, or

death of a provider on 1 January 1996, in Act no. 155/1995 Coll., on

Pension Insurance, (the foundation for insurance was already laid by Act

no. 589/1992 Coll., on Insurance Contributions, which functioned during

the transition period as an instrument for the gradual direction of

collected contributions into the state budget). This is a system of

public insurance whose function and principles are different from

commercial (private law) insurance, which is repeatedly set forth in

theoretical writings (which the Ministry of Labor and Social Affairs

mentioned in its brief). For example, J. Vostatek (Sociální a soukromé

pojištění [Social and Private Insurance], Codex Bohemia, 1996, p. 65)

states: “The statutory obligation for insurance is a key element of

social insurance, whereby it differs from the typical contractual

insurance. Mandatory insurance can be used to overcome the obstacle of

insurability of risks that is typical in private insurance – e.g., the

risk of unemployment is considered uninsurable or difficult to insure in

the private insurance sector, and ‘market failure’ is a typical event.

Social insurance is generally financed through contributions paid by

employees and employers, sometimes with state subsidies.”
 
58.

Pre-war specialized literature already pointed out the different nature

of social insurance and contractual insurance. Reference is made

primarily to the five-part Slovník veřejného práva československého

[Dictionary of Czechoslovak Public Law], specifically the entries

“Private insurance (contractual)” in volume III, Brno 1934, p. 147 et

seq. and “Social Insurance” in volume IV, Brno 1938, p. 343 et seq.;

these entries state, e.g.: “The name private insurance means all kinds

of insurance based on a private law contractual relationship between the

parties, as distinguished from so-called social insurance. … In

contrast to private insurance, however, social insurance has certain

different typical characteristics. … The most important conceptual

difference between private and social insurance is that private

insurance is based on the free decision of the insured party and the

insurer, whereas social insurance is based on a statutory order: anyone

who falls within the circle of persons whom the law includes in social

insurance must be insured, whether he wishes to or not, and the insurer

assigned thereto by law, must accept the insurance, even if it knows in

advance that the risk connected to this insured party is too great to be

covered by individual insurance premiums.”
 
59. Even respecting

the difference between commercial and public insurance, which cannot be

based on the principle of pure equivalence (the level of performance

fully reflects the level of premiums), the relationship between the

amount of contributions paid and the amount of pension allocated must

reflect a certain degree of proportionality for individual participants

in order to constitutionally fulfill Art. 30 par. 1 of the Charter.
 
60.

The background report to Act no. 155/1995 Coll. (publication 1574, the

Chamber of Deputies of the Parliament of the Czech Republic, I. term of

office) states that “the level of rates and conditions for contributions

for social security are conceived so that the contributions will cover

expenditures for pension and sickness insurance benefits that are

derived from the income of economically active citizens under the

current legal framework; these are pensions for old-age, widows,

widowers, orphans, disability, partial disability, service, sickness

insurance, support when taking care of a family member, financial

assistance in maternity, an equalization contribution for pregnancy and

maternity. … The contributions collected will be a specially tracked

income of the state budget, in accordance with budget rules, which will

be used to pay all expenditures for social security and employment

[policy] through the budget of the Ministry of Labor and Social Affairs

of the Czech Republic.”
 
61. Thus, premiums and their level (a

total of 28%, of which the employee pays 6.5% and the employer 21.5%)

are set only on the basis of economic calculations so that pensions paid

in a given year are fully covered by the payments collected from

insured persons in that year.
 
62. Thus, in this structure, the

income side fundamentally reflects the solidarity principle, because an

insured person pays into the system amounts that are directly

proportional to his (taxed) income, and only the protective and

re-distributive function of social policy is implemented. This

conclusion is not changed by the fact that Act no. 261/2007 Coll.

“capped” payments into the pension system (the maximum payment for

premiums in 2010 is seventy two times the average wage).
 
 
Material security – replacement ratio
 
63.

The Charter of Fundamental Rights and Freedoms guarantees all

participants of pension insurance adequate material security. Adequacy

[proportionality] must be understood as an indefinite legal concept. The

proportionality of material security in relation to individual

participants in pension insurance must be understood in relation to

satisfying an individual’s living needs, in relation to the widest

possible circle of persons, but also in relation to the insured person

as a payer who co-creates the financial resources from which the

material security will be provided. Proportionality as a legal

(constitutional) category, however, is often aimed rather at reviewing

whether a particular system of pension (or generally social) insurance

is capable, in the event of defined social events, of providing the

affected person an amount of funds that will provide for his life, while

observing the category of dignity in his social context.
 
64. An

expression of the criterion of proportionality is the internationally

used comparison measure of the “individual replacement ratio of the

typical income individual.” A typical example of the use of this

comparison criterion as a basic legal criterion for the proportionality

of the system is, for example, the European Social Security Code

(promulgated as no. 90/2001 Coll. of International Treaties). Art. 25

requires each signatory to ensure the provision of benefits in old age

to protected persons according to the criteria provided. It then sets

the criteria for retirement age and criteria for the minimum scope of

covered persons. As regards the level of benefits, Art. 28 states that a

benefit is a regularly repeating payment. Art. 65 defines a typical

benefits recipient, who is defined in terms of income as a typical

qualified laborer, and defines a desirable replacement ratio. A typical

recipient of benefits in old age (and thus a referential object of the

proportionality of the system) is a man, a qualified laborer, of

retirement age, with a wife, who is guaranteed a replacement ratio of

40%. A somewhat stricter, but analogously constructed criterion of

proportionality is found in International Labour Organization Convention

no. 128 on Invalidity, Old-Age, and Survivors’ Benefits (published as

no. 416/1991 Coll.), which requires a replacement ratio of 45% for a

typical income individual.
 
65. Thus, it is evident that a basic

legal requirement for pension systems is to provide a certain

replacement ratio, not to all persons covered by the system, but to

persons defined as the typical income individual, and this construction

is aimed at a person with more or less average income. None of the

international law instruments by which the Czech Republic is bound

requires that the same relative value of the replacement ratio (as a

percentage) be achieved for every insured person.
 
66. According

to the Czech Republic’s last report on fulfillment of the European

Social Security Code (see Sixth Report on Fulfillment of the European

Social Security Code, at

www.mpsv.cz/files/clanky/6219/zprava_EZSZ_6.pdf) the replacement

ratio for an income-typical individual in 2006 was 46.2 %, in 2007

45.1%, and in 2008 44.6 %. The general replacement ratio (the ratio

between the average wage and the average pension) has declined similarly

– in 2003 it was 42.2% (of gross wages), in 2007 40.6 %. This decline

is caused by disproportionate wage growth, the pension formula used in a

defined benefit system, and again, the attempt to maintain a financial

balance in the system (the declining number of economically active

insured persons in relation to the recipients of pension insurance

benefits).
 
67. The foregoing indicates that the Czech pension

insurance system meets the fundamental requirement of proportionality,

as defined by international treaty instruments. Of course, it is able to

meet it (given that it is a pay as you go defined benefit system) only

at the price of a high degree of inter-generational and

intra-generational solidarity. In order to maintain a payment balance

and preserve the desirable replacement ratio for individuals with

earnings approximately around the average wage, it is necessary to give

up the analogous degree of individual replacement ratio for individuals

whose incomes are at multiples of the average wage. The date in the

following table can serve as an example:
 
Multiple of average wage    Old age pension allocated in the year
                                           2003   2004   2005   2006   2007
0.7                                      55.6    53.6    55.4    55.7    55.2
1.0                                      44.3    42.9    44.2   44.4     44.0
1.5                                      32.1    31.2    32.2   32.3     32.0
2.0                                      25.6    24.9    25.6   25.7     25.5
2.5                                      21.7    21.1    21.7   21.8     21.6
3.0                                      19.1   18.6     19.1    19.1    19.0
 
68.

It is evident from this overview that the system is capable of

guaranteeing, in the long term, a satisfactory replacement ratio for

individuals with incomes around the average wage, and provides an

advantage to individuals with a below-average wage (which is seen as a

justified advantage). It is able to do so only at the price of reducing

the individual replacement ratio for persons with a twofold or higher

multiple of the average wage – from a general viewpoint the system also

guarantees them a benefit which, according to the legal framework, is a

certain minimum for a dignified existence in old age, nonetheless it is a

benefit that cannot guarantee preservation of the living standard that

these persons were accustomed to in their time of economic activity.
 
 
Material security – reduction limit
 
69.

The replacement ratio, i.e., the relationship between a wage and the

pension benefit calculated from it, demonstrating a clearly regressive

character, results from the structure of benefits in a pension system

whose key element is a so-called reduction limit.
 
Year                                  2003     2004   2005   2006      2007   2008     2009
 
First reduction limit        7,400    7,500  8,400  9,100     9,600  10,000  10,500
 
in % of average wage    44.1     41.9     44.7    45.4         44.6      43.0      ca. 45
 
Second reduction limit   17,900 19,200 20,500 21,800 23,300 24,800 27,000
 
in % of average wage     106.7   107.4   109.0   108.7   108.2  106.6  ca.117.4
 
 
70.

As a result of the reduction limits decisive for calculation of

pensions, with increasing earnings the ratio of pension to those

earnings declines. With the exception of 2005 and 2006, the first

reduction limit was increased more slowly than the average wage, so that

the band of earnings that are fully included in calculating pensions

decreased (relative to the average wage). In the period 2003-2008 the

second reduction limit grew somewhat faster (by 3.4 percent) than the

first reduction limit. The result was that the band of earnings that are

included by 30$ for calculating pensions increased more (absolutely and

relatively as a percentage) than the band where earnings are fully

included in calculating pension amounts, and which affect the level of

all pensions. These trends were reflected in a reduction of the level of

newly allocated pensions (their ratio to wages) until 2004 and again

after 2006 (see the cited report from the Ministry of Labor and Social

Affairs).
 
71. Thus, the Constitutional Court must state that the

legal framework implemented by the contested § 15 of Act no. 155/1995

Coll. (in particularly establishing reduction limits) creates a

situation where a participant in the pension system who contributes

three times more than a participant who contributes an amount calculated

from an average wage is allocated a pension of – relatively – less than

half. Yet, statistical date show that ca. 30% of insured parties, in

the calculation of pension benefits, will cross the second reduction

limit (ca. 95% of insured persons cross the first reduction limit).

Thus, it is evident that the legal framework, in the attempt to ensure

adequate material security to all participants in pension insurance,

does not ensure for some insured persons a proportionate material

security that reflects, in a recognizable degree, the principle of a

merit basis, i.e. fulfilling the stimulation function of social policy.
 
 
Replacement ratios – the principle of a merit basis
 
72.

Despite considerable differences between pension systems in individual

countries (in the method of financing and principles reflected in the

construction of pensions), we can provide, at least for illustration,

the replacement ratios in the basic pension systems of selected European

countries that were provided by the Ministry of Labor and Social

Affairs.
 
Country multiple of individual income
                                 0.5    0.75   1        1.5     2       2.5
FINLAND                90.7  78.8    78.8   79.2   78.3   79.3
ITALY                       9.3   88      88.8   88.4   89.1   89
CROATIA                66.7   63.1   61.6  59.7   59.6   58.9
ESTONIA                59.9   60.6   60.9  61.3   61.5   61.7
NETHERLANDS   82.5   88.2   84.1   85.8   83.8   82.8
BELGIUM               82.7   63.8   62.8  50.6   40.6   34.2
IRELAND               63       47     36.6   27.4   21.9   18.3
NORWAY               85.5    73.1  65.1   58.2   50.1   42.8
DENMARK             95.6    68     54.1   42.5   35.5   30.8
SWITZERLAND    71.4    68.9   67.3   53      41.4   34.3
GREAT BRITAIN   78.4    57.7   47.6   38.2   29.8   24.5
 
73.

Although the replacement ratios in individual countries are different,

in view of the nature of each system and in view of the degree of

solidarity reflected in them, in recent years they share a trend that

arises from European recommendations. Most countries are reducing, or

heading toward reducing, contributions to the state pension system as

the first pillar of a pension system, and are introducing or increasing

contributions into the other pillars. In particular with the third

pillar, this trend permits strengthening the merit principle in the

pension system (i.e., to the benefit of high income groups). Among these

countries we can name, for example, Germany, where in a (similarly

conceived) pay as you go system, since 2002, part of the state insurance

is also being redirected to the other pillars (state organized funds).

The German model was followed by Slovakia, which comes from the same

pension system foundations as the Czech Republic. One of the main

motives for changes in the Slovak pension system was the attempt to

strengthen the merit principle (cf. from the background report to the

law: “The government draft of the Act on Social Insurance is a law on a

proportionate degree of solidarity and a proportionate degree of merit,

because these two principles must be balanced and also applied vis-à-vis

all persons who contribute to the system.”). Besides that, we must

emphasize that in a number of European Union countries there is, in

addition to a general pension system, an independent legal framework for

pension insurance for certain professional groups, which reflects not

only the criteria of risk and difficulty of certain professions

(employees working in conditions that are dangerous to health, members

of security and armed forces), but also a requirement for independence

in the exercise of a given profession (state administration employees,

judges). In these legal frameworks, this form of applying the

constitutional principle of equality (unequal things cannot be regulated

equally) clearly reflects the merit principle in the pension system.
 
74.

In reviewing the proportionality of all relevant components of the

pension system (including the merit principle), the Constitutional Court

also takes into consideration the opinions of experts who have studied

this issue for a long time; in this regard it can point to the

conclusions of the Bezděk Commission, which, in reviewing the degree of

merit in the pension system, reached similar conclusions as those cited

from the background report to the Slovak law: “Studies have confirmed

that the present system is unsustainable in the long term, and in the

long term will generate annual deficits of 4 to 5% of GDP. This result

corresponds to the conclusions of earlier studies. However, the present

calculations also demonstrate that the present system is

micro-economically inefficient. It is characterized by a strong income

redistribution, which leads to high replacement ratios for low-income

individuals and a low replacement ratio for individuals with

above-average incomes. The insurance elements of the system are

repressed, with a relatively high contribution rate. Thus, high

redistribution can cause: (i) a significant decline in living standards

for persons with above average income upon the transition from work

activity to retirement, (ii) the transition can be painful, particularly

for the middle class, whose incomes range only barely above the average

wage level and which, in view of the high insurance rate, limiting the

ability to save privately, could not provide for its old age from its

own resources.
 
One of the things learned from studies of the

alternatives for pension reform is the fact that there is insufficient

scope to strengthen the merit factor in the state pension system.

Measures relatively increasing the pension of high income individuals

would lead to a dramatic increase in the pension system’s expenses, and

would thus increase the already strong tendencies toward deficits. An

alternative possibility is to finance the relative increase of the

replacement ratio of high income individuals by reducing the

re-distribution within the pension system, i.e. adopting measures that

would relatively reduce the level of newly allocated pensions for below

average income persons.
 
The political decision should be in line

with economic principles, and should take into account the starting

condition of the Czech pension system. Today’s system is not financial

sustainable in the long term. It is characterized by a very high degree

of income solidarity. Likewise, it is characterized by a very high

volume of that solidarity as a result of a high contribution rate. The

system is inter-generationally unfair and its financing is not

diversified. The parameters of the pension system must be considerably

adjusted. The degree of income solidarity in today’s system is high. It

can be left at this level, which eliminates the risk of poverty for

endangered segments of the population. At the same time, of course, it

will have a negative effect on the labor market and on the motivation

for citizens to pay high contributions to an equalizing system.

Therefore, we consider it appropriate to reduce the volume of income

solidarity in the state pillar.”
 
75. The Insurance Mathematical

Report on Social Insurance from the Ministry of Labor and Social Affairs

(http://www.mpsv.cz/files/clanky/5886/zprava_2008_cz.pdf) states: “It

is appropriate to supplement parameter changes with reform aimed at

diversifying the system, diversifying both the income and the expense

sides of the system, which should lead to strengthening the certainty of

appropriate income in old age. Thus, reform should lead to

strengthening the differentiation of pensions for middle and higher

income groups. Possible strengthening in the equivalence of pensions

comes from the possibilities for reducing the level of pensions for

lower income groups. Scope for differentiating pensions is given by the

difference between the minimum allocated pension and the average

pension. The possibilities for differentiating pensions also depend on

the level of the contribution ceiling, which in its way determines to

what degree differentiation is to be addressed in the system of basic

pension insurance. With a relatively low contribution ceiling,

differentiation will be the role of supplemental schemes, and, in

contrast, with a high ceiling or no ceiling, it must be addressed in the

system of basic pension insurance.
 
Increasing equivalence while

maintaining the level of total system expenses and the existing

protection against the risk of poverty in old age should be achieved for

the middle and higher income groups at the price of strengthening the

leveling of pensions for lower income groups. This can be achieved, for

example, by combining an equivalence system with a minimum pension,

where part of the contributions is targeted at covering the minimum

pension, and the rest goes into the equivalence scheme. Another

possibility is a combination of a certain form of a flat pension with an

equivalence scheme, where the entitlements in the equivalence scheme

arise only after a certain income level. Up to that income level,

contributions are made only into the flat pension scheme, and above that

level part of the contributions is made into the equivalence scheme.

Both possibilities would permit including an element of fund financing.”
 
76.

Of course, the experts also reviewed the degree of merit basis

reflected in the pension system primarily through the prism of economic

effects (i.e., particularly in terms of the long term sustainability of

the system), which, of course, overlooks the constitutionally understood

principle of equality. Nonetheless, the experts’ conclusions clearly

reveal signs of a violation of the principle of equality of individuals

and groups as participants in pension insurance (which endangers the

fulfillment of the basic functions of social policy as a whole, and

also, as a result, the proper functioning of the pension system that is

supposed to reflect these functions). Some experts indicate in their

conclusions that the requirement of increasing the financial resources

of the system need not be the only path to strengthening the merit

principle.
 
 
Constitutionality of the contested provision
 
77.

In its case law, the Constitutional Court formulated viewpoints for

review of the constitutionality of the legal framework for social

security. In judgment file no. Pl. ÚS 12/94 it stated that “in all

existing social security systems the principles of solidarity and

equivalence are represented in varying degrees. Every system of social

security carries advantages or disadvantages for certain social groups,

depending on whether it gives preference to the viewpoint of solidarity

or the equivalence principle. This regulation is reserved to the

legislature, which cannot act arbitrarily, but, when setting the

preference, must take into account the public values pursued. In the

area subject to review, an area of economic legislation, the legislature

has considerably wider discretion than in laws that directly affect the

fundamental human rights and freedoms. … The Constitutional Court of

the Czech Republic cannot agree with the petition’s claim that

contributions paid by beneficiaries of old age pensions do not bring

‘counter-performance’ in any group to which they contribute, and that it

is therefore a hidden tax that is imposed on them in violation of valid

regulations.”
 
78. The Court confirmed these viewpoints in other

judgments as well, in particular the matters file no. Pl. ÚS 14/02, Pl.

ÚS 1/08 (“In judgment file no. Pl. ÚS 12/94 – although it concerned the

area of social security – the Constitutional Court stated that the

question of whether to prefer the viewpoint of solidarity or the

equivalence principle is reserved to the legislature, which cannot act

arbitrarily, but, when setting the preference, must take into account

the public values pursued.”), and II.ÚS 348/04 ("The Constitutional

Court, in its judgment file no. Pl. ÚS 12/94, stated that in the area of

social security as well, when applying contributions, this concerns the

legal institution of insurance, because it reflects a legal situation

in which the citizen transfers his risk, for payment, to another entity,

and that entity accepts the risk and is obligated to a particular

performance. Thus, it follows from the insurance relationship, even if

it is a public law relationship, that fulfillment of conditions by the

insured party, the resulting right to a pension corresponds to an

obligation of the other party to provide that performance in pension

insurance.”)
 
79. The Court also did not deviate from the line of

thought thus laid out in judgment Pl. ÚS 2/08, in which it stated

regarding social rights: “A defining element of these rights is the fact

that they are not unconditional in nature, and can be exercised only

within the bounds of the laws (Art. 41 par. 1 of the Charter). This

provision gives the legislature the right to set specific conditions for

implementing social rights. The statutory implementation may not

conflict with constitutional principles; in other words, the statutes

may not deny or annul constitutionally guaranteed social rights. In

implementing the constitutional framework enshrined in the Charter, the

legislature must be governed by Art. 4 par. 4 of the Charter, under

which, in employing the provisions concerning limitations upon the

fundamental rights and basic freedoms, the essence and significance of

these rights and freedoms must be preserved. With social rights, we can

say that a collective limitation on them is precisely the fact that they

are not, unlike, for example, the fundamental rights and freedoms,

directly enforceable on the basis of the Charter. The limitation of

these rights consists of the need for a statutory implementation, which

is also at the same time the condition for specific implementation of

individual rights."
 
80. The dissenting judges Holländer,

Malenovský, Cepl, Čermák, Güttler, Mucha and Procházka, in their

dissenting opinion to judgment file no. Pl. ÚS 14/02, also subscribed to

the thesis expressed in judgment Pl. ÚS 12/94, in which “the court

stated that it is the obligation of the legislature to transparently

express the ratio of the components of solidarity and equivalence in the

social insurance system (including health insurance); it also stated

that this division may not be arbitrary. In the opposite case, i.e. in

the absence of the element of equivalence, the reviewed institution

would lose its legal nature, it would cease to be insurance, and acquire

the character of a tax.” They then drew the following consequence:

“Thus, Art. 31 of the Charter, in conjunction with Art. 41 and Art. 4

par. 4 of the Charter, gives rise to a fundamental right for the insured

person to a component of equivalence in public health insurance

transparently determined by the legislature, and in such an extent as

preserves the nature of the legal institution of insurance and does not

change it into a tax.”
 
81. From this outline of the

Constitutional Court’s case law, we can state the following general

theses in relation to the constitutional enshrining of social rights:

The first is that there is narrower scope for review of the

constitutionality of laws governing social rights than for fundamental

rights under chapters two, three and five of the Charter, scope that is

defined by Art. 41 par. 1 and Art. 4 par. 4 of the Charter. The second

thesis is the ban (prohibition) on arbitrariness in regulating these

rights (Art. 1 and Art. 3 par. 1 of the Charter), and the third thesis

is the necessity of statutory regulation of social rights (Art. 41 par. 1

of the Charter). The combination of the first and second theses is the

basic starting point for review of the constitutionality of § 15 of Act

no. 155/1995 Coll., i.e., it is the maxim that Art. 31 of the Charter,

in conjunction with Art. 41 and Art. 4 par. 4 of the Charter, as well as

Art. 1 and Art. 3 par. 1 of the Charter, give rise to the insured

person’s fundamental right to a component of equivalence

(proportionality), transparently determined by the legislature, in

public pension, sickness and health insurance, in a degree that

preserves the nature of the legal institution of insurance and does not

change it into a tax.
 
82. The relationship between the

individual and the whole (the society of which he is a member) is

reflected in a democratic society in the “tension” between the values of

justice and freedom. In addition, primarily in connection with the

positing of the “social question” in the 19th and 20th centuries, the

question arises of the relationship between social justice and the

acceptable degree of institutional activities limiting freedom. In this

regard the acceptability of individual burdens (detriment) at the

expense of public values is fundamental. In the present matter this

question is reflected in the determination of the degree of

acceptability of inequality among subjects in view of the inequality of

their incomes, pension insurance contributions, and the level of

pensions.
 
83. An expression of the constitutional prohibition on

arbitrariness in setting the rights and obligations of subjects is the

constitutional principle of equality. A summary of the Constitutional

Court’s previous case law on the rights arising from it is found in

judgment Pl. ÚS 6/05. In it, the Constitutional Court referred to its

extensive and settled case law, in which it formulated the viewpoint of

constitutional evaluation of the category of equality (see, especially

judgments file no. Pl. ÚS 16/93, Pl. ÚS 36/93, Pl. ÚS 4/95, Pl. ÚS 5/95,

Pl. ÚS 9/95, Pl. ÚS 33/96, Pl. ÚS 15/02, Pl. ÚS 33/03, and Pl. ÚS

47/04). In its understanding of the constitutional principle of equality

it agreed particularly with the conclusion stated by the Constitutional

Court of the Czech and Slovak Federal Republic (“CSFR”) (judgment file

no. Pl. ÚS 22/92, Collection of Decisions of the Constitutional Court of

the CSFR, judgment no. 11, p. 37). In it, the Constitutional Court of

the CSFR understood equality as a relative category that requires

removing unjustified differences. Therefore, the principle of equality

must be understood to mean that legal differentiation in the access to

certain rights may not be an expression of arbitrariness; however, it

does not follow that everyone must be granted every right. The

Constitutional Court thus shifted the content of the principle of

equality into the area of constitutional acceptability of aspects for

differentiating subjects and rights. It sees the first aspect as ruling

out arbitrariness. The second aspect in evaluating the constitutionality

of a legal regulation that establishes inequality is the interference

that it creates in one of the fundamental rights and freedoms. In other

words, in its case law the Constitutional Court interprets the

constitutional principle of equality in terms of accessory and

non-accessory equality. Thus, a particular legal framework that gives an

advantage to one group or category of persons over others may not,

without anything further, be described as violation of the principle of

equality. The legislature has a certain discretion to deliberate whether

to establish such preferential treatment. It must see to it that the

approach that grants an advantage is based on objective and reasonable

grounds (a legitimate legislative aim) and that there is a proportional

relationship between that aim and the means used to achieve it (see,

e.g., decisions of the European Court of Human Rights in the matters

Abdulaziz, Cabales and Balkandali from 1985, § 72; Lithgow from 1986, §

177; Inze from 1987, § 41).
 
84. In the event of conflict between

some public goods with fundamental rights, the Constitutional Court

applied a different structure of the principle of proportionality (with

which it also tested the conflict of fundamental rights arising from the

principle of equality with other rights, or public goods), than the one

represented by the imperative for optimalization (Pl. ÚS 4/94, Pl. ÚS

41/02). This alternative structure of the principle of proportionality

could be called ruling out extreme disproportionality. This involved

cases of review of the constitutionality of the legal framework of

taxes, fees, or other similar statutorily imposed mandatory payments

(also including mandatory insurance) as well as monetary penalties (Pl.

ÚS 3/02, Pl. ÚS 12/03, and Pl. ÚS 7/03).
 
85. We can draw the

following conclusions from the maxims formulated in the cited judgments

for the constitutional review of the relationship between the level of

income, the level of pension insurance contributions, and the level of

pensions: The constitutional principle of the separation of powers (Art.

2 par. 1 of the Constitution), as well as the constitutional definition

of the legislative power (Art. 15 par. 1 of the Constitution), gives

rise to wide discretion for the legislature in decision-making on the

relationship between the level of pension insurance contributions and

the degree of solidarity, reflected in the degree of inequality between

the level of income, insurance contributions, and pensions. The

legislature bears political responsibility for the consequences of this

decision-making. Although pension insurance contributions are a public

law mandatory financial performance to the state, and thus interference

in the property substratum, and thus also the property rights of the

obligated subject, unless other conditions are met it does not interfere

with constitutionally protected property rights under Art. 11 of the

Charter and Art. 1 of the Protocol to the Convention (see also Pl. ÚS

12/94).
 
86. Constitutional review of the proportionality

connection between income level, pension insurance contribution and

pension level includes evaluating the observance of safeguards arising

from the constitutional principle of equality, both non-accessory (Art. 1

of the Charter), i.e., arising from the requirement of ruling out

arbitrariness when distinguishing subjects and rights, and accessory, in

the scope defined in Art. 3 par. 1 of the Charter. Reviewing

non-accessory equality is based on review of the connection between the

legislative instrument chosen by the legislature and its intended aim.

For the reviewed legal framework to be constitutional in terms of

non-accessory inequality it is sufficient if the classification reviewed

is in some rational relationship to the purpose of the law, i.e.,

whether it can affect the achieving of the aim in some way.
 
87.

In judgment file no. Pl. ÚS 7/03 the Constitutional Court concluded,

regarding fulfillment of the conditions for non-accessory inequality:

“If the purpose of different contribution rates is to ensure that it is

fulfilled in accordance with the structure of insured events and if the

data contained in the brief from the party to the proceedings indicate

the most disadvantageous rates of damage in the mining field, we cannot

do otherwise than describe the difference in insurance contribution

rates set forth in appendix no. 2 to decree no. 125/1993 Coll., as

amended by later regulations, as corresponding to the purpose of the

legal framework as described by the party. Due to the foregoing we

cannot agree to the petitioner’s objection concerning the

unconstitutional inequality of the contested legal regulation.” A

contrario the foregoing indicates that unconstitutionality of a legal

framework consisting of non-accessory inequality is given by the lack of

a connection between the legislative means and its declared (intended)

aim.
 
88. According to the background report to the government

draft of the Pension Insurance Act “the ratio of the average old age

pension to the average net wage at present (i.e. in 1995) reaches 56%.

Only after an increase in pensioners’ income from supplemental pension

insurance in the perspective of 10 years or more can the differentiation

of pensions, with regard to the possibility of more marked

differentiation of income from supplemental pension insurance according

to citizens’ individual expectations in the basic system, be gradually

reduced according to earnings level and number of years worked.”
 
89.

An illustrative calculation of the ratio of average earnings and the

old-age pension achieved shows data that for an employee with an income

of ca. 50% of the average wage the replacement ratio to gross income

would be ca. 88 % (ca. CZK 9,000), for an employee with income of 100%

of the average wage, ca. 42% (ca. CZK 10,000), for an employee with

income of 200% of the average wage ca. 29% (ca. CZK 14,000), and for an

employee with income of 300% of the average wage ca. 15% (ca. CZK

15,500).
 
90. If the second of the aims of the Pension Insurance

Act was achieved, i.e., reducing the differentiation of pensions

according to earnings level, the first aim, i.e. opening room for

differentiation of pensions, was not achieved. According to information

from the Czech Statistical Office concerning supplemental pension

insurance: “there is still low awareness of the role that this form of

old age security can play for a large part of the population. In 2004

people saved an average of just under CZK 397 per month, in 2001 it was

CZK 348. Although their incomes are growing, they are not putting more

into pension funds – they put only 2.2% of their average gross wage per

month into supplemental pension insurance, and this ratio has even

declined each year (in 1996 it was 3.2%).”

(http://www.czso.cz/csu/csu.nsf/informace/ckta130905.doc)
 
91.

The legislative instruments for achieving the second of the

abovementioned aims of the statutory framework for social security, i.e.

differentiation of pensions while ensuring social solidarity, are

necessarily tied to the statutory framework of contributions for social

security, specifically with the establishment of the maximum assessment

bases for paying contributions by Act no. 217/2007 Coll., which amended §

15a of Act no. 589/1992 Coll., on Contributions to Social Security and

the Contribution for State Employment Policy. Thus, 12 years after the

Pension Insurance Act went into effect, legislative discretion was

created for a proportional accord between the purposes of social

solidarity and differentiation in view of income level and level of

contributions for pension insurance.
 
92. Act no. 362/2009 Coll.,

which Amends Certain Acts in Connection with the Draft act on the State

Budget of the Czech Republic for 2010, reduced, or ultimately cancelled

the cited legislative means removing the extreme disproportionality

between the statutory framework and its purpose. According to the new

provision it created, § 15b of Act no. 589/1992 Coll., for the period

from 1 January 2010 to 31 December 2010 the maximum assessment base for

paying contributions under § 15a par. 1 and 5 of the cited Act is an

amount of seventy-two times the average wage. The background report

(publication 917) states in this regard: “the increase of the maximum

assessment base for insurance contributions for 2010 from forty-eight to

seventy-two times the average wage … will be reflected in the

collection of contributions for social security and contributions to

state employment policy of CZK 4 billion … The aim of this draft is to

increase the income of the state budget.”
 
93. This outlined

purpose of the new legal framework for the maximum measurement bases for

paying contributions for pension insurance has two consequences. The

first affects evaluation of the relevance of non-accessory inequality

when reviewing the constitutionality of § 15 of the Pension Insurance

Act. We can conclude form the recapitulation of the development of the

law that in the period until 1 January 2008, as well as after 1 January

2010, it lacked a connection between the stated aim (leveling pensions

under of the Pension Insurance Act and their actual differentiation in

the supplemental pension insurance system) and the chosen legislative

means (adjustment of the contribution rates and the maximum assessment

base). The second consequence also affects evaluation of accessory

inequality. If its subject matter is to evaluate the bounds beyond which

public law mandatory financial contributions from an individual to the

state are no longer pension insurance contributions but a tax, then this

conclusion follows from the background report to the government draft

Act amending certain Acts in connection with the draft Act on the state

budget of the Czech Republic for 2010, in which the government,

completely sincerely, considers reduction of the maximum assessment base

to be a source for “increasing income for the state budget,” which is

the purpose of a tax. Moreover, this conclusion is also justified by the

curve showing the relationship between the level of contribution for

pension insurance and the level of old-age pension, where the connection

between these two parameters diverges extremely disproportionately. In

the absence of an even reducing the extreme disproportionality, which in

accordance with foreign legal frameworks – see, e.g., the pension

insurance laws in Germany – can be seen in the present maximum

assessment base for paying contributions, we have no choice but to state

that the contested legal framework also violates the principle of

accessory inequality.
 
94. In evaluating the legal framework,

i.e. the law implementing the fundamental right to adequate material

security, the Constitutional Court concluded that the construction in §

15, establishing two reduction limits at the present levels, given the

existence of a system of contributions to pension insurance without an

effective “ceiling,” establishes marked disproportionality between the

level of contributions to the insurance system, income levels, and the

level of allocated pension benefits for some insured persons, whereby it

violates Art. 1 and Art. 3 par. 1 of the Charter. Moreover, this

structure is affected by steps taken by the executive branch under § 107

par. 2 of Act no. 155/1995 Coll., based on which the government may (in

a manner acceptable in terms of functionality) increase the “reduction”

limits, but the legislature, in the current legal framework,

transferred to the government the right to modify the level of the

reduction limits without the necessary limits or criteria, which were

present in the previous legal framework. The Constitutional Court also

could not overlook the fact that the entire complicated structure of the

pension system is sufficiently non-transparent that it is de facto

completely incomprehensible to its users; thus, for the majority of

insured persons the calculated level of pension benefits becomes

unverifiable (cf. the dissenting opinion to Pl. ÚS 14/02).
 
95.

In reviewing the problem of the pension system, to which the contested

law belongs, the Constitutional Court took as its starting point the

abovementioned case law, which is in line with the approach taken by

foreign constitutional courts in the area of social rights, and thus

focused directly on the level of constitutional rights. The

Constitutional Court leaves the actual construction of the pension

system fully on the legislature, which has wide discretion for

implementing the social rights enshrined in the Charter; the

Constitutional Court only defines negative limits that cannot be

crossed, i.e., it cannot (positively) determine or anticipate any

quantifiable amounts. The German Constitutional Court followed analogous

methodology in reviewing the matter of social reform, the so-called

“Hartz IV” law (decision of 9 February 2010); it also stated that the

open field for the legislature’s activity corresponds to restrained

inspection and review of ordinary law.
 
96. The Constitutional

Court states that it is not its role to evaluate the correctness

(suitability) of the calculation of pension insurance benefits; however,

it is its obligation to review whether the legal framework selected by

the legislature successfully meets the safeguards enshrined in the

Charter, in other words, whether the construction is constitutional. The

criterion for constitutionality is the “proportionality” of the

consequences of the selected calculation, where on the one hand the

limiting corrective for the merit principle is the imperative of

(accessory and non-accessory) equality, and on the other hand that

corrective is the “proportionality” of minimum material security, not

only in the sense of eliminating poverty, but also securing a dignified

living standard for low-income insured persons.
 
97. It is not up

to the Constitutional Court to evaluate the chosen pension system model

from political or economic viewpoints (in the sense of de lege lata),

or to model an optimal pension system (in the sense of de lege ferenda

considerations). The selection and parameters of the system have for a

number of years been the subject of political and specialized

discussions in connection with (more or less consensually seen) the

danger to long term sustainability of the existing system in view of

demographic trends. In these specialized and political debates it will

be necessary to consider all social and economic aspects of the legal

regulation of the pension system, which, for the abovementioned reasons,

the Constitutional Court could not take into account. Nonetheless,

based on its review, the Constitutional Court emphasizes that, given the

existence of a range of pension systems and methods for calculating

pension benefits, it is necessary to choose an alternative that will

reflect all the principles of social policy, as well as a system of

pension insurance that will thoroughly respect constitutional principles

and meet Art. 30 par. 1, Art. 1 and Art. 3 par. 1 of the Charter, and

at the same time, preserve the essence of these fundamental rights under

Art. 4 par. 4 of the Charter.
 
98. For the foregoing reasons the

Constitutional Court granted the petition for the Regional Court in

Ostrava seeking annulment of § 15 of Act no. 155/1995 Coll., and

annulled the provision.
 
99. In view of the complexity of the

whole issue and the pension system reform being prepared, the

Constitutional Court postponed the effective date of its decision until

30 September 2011, with the provision that the annulled provisions

remain applicable until then.
 
Instruction: Judgments of the Constitutional Court cannot be appealed.
 
 
 
Dissenting Opinion of Judge Jiří Nykodým
 

The

judgment gives a negative answer to the question posed, whether § 15 of

Act no. 155/1995 Coll., especially the so-called second reduction

limit, is consistent with the constitutional order; the judgment’s

reasoning, according to the conclusions reached, rests on the

unconstitutional implementation of the right to adequate material

security enshrined in Art. 30 par. 1 of the Charter, and on violation of

the principle of equality enshrined in Art. 1 of the Charter. It

concludes that “the criterion for constitutionality is the

‘proportionality’ of the consequences of the selected structure, where

on the one hand the limiting corrective of the merit principle is the

imperative of (accessory and non-accessory) equality, and on the other

hand that corrective is the “proportionality” of minimum material

security, not only in the sense of eliminating poverty, but also

securing a dignified living standard for low-income insured persons.
 
In

terms of financing, our pension insurance system is financed on a pay

as you go basis, and therefore the level of benefits received is not

directly dependent on the contributions paid. The level of benefits is

basically based on the level of contributions paid by the future

generation. This is a system that requires high inter-generational

solidarity, because today’s active population contributes to the

pensions of today’s pensioners, which, of course, it does in the belief

that the next active generation will contribute to its pensions. As

regards financial balance, this system depends on demographic trends, as

well as the structure of the income of persons in the system. From this

point of view the question of the degree of solidarity is not, in my

opinion, primarily a constitutional law question, but an economic

question, and thus primarily a political question. One can recognize

that under certain circumstances it can also become a constitutional law

question, but that would have to be a case of flagrant injustice. I

doubt that we could describe as such a situation where the replacement

ratio for high income groups reaches 20% and for low income groups ca.

46%. If we simply compare both numbers, that does appear to be an

inequality. However, even if it were so, that inequality is justifiable,

by preservation of social conciliation between “the rich and the poor,”

and by the system’s limited resources; in any case, the Constitutional

Court, in judgment file no. Pl. ÚS 2/08 (166/2008 Coll., N 73/49 SbNU

85) addressed the question of the nature of social rights and their

difference from fundamental rights to the effect that they are

specifically characterized by a close dependence on the state’s economic

situation.
 
The constitutional principle of equality expressed

in Art. 1 of the Charter does not mean absolute equality, as the

judgment itself recognizes. In judgment file no. Pl. ÚS 6/96 (published

as no. 295/96 Coll., N 113/6 SbNU 313), to which other case law was

connected, the Constitutional Court specifically expressed this as

follows: “The constitutional principle of equality, enshrined in law in

Art. l of the Charter, cannot be understood absolutely and equality

understood as an abstract category. The Constitutional Court of the CSFR

stated its understanding of equality, enshrined in the cited article,

as relative equality, as intended by all democratic constitutions,

requiring only the removal of unjustified differences (judgment of the

Constitutional Court of the CSFR published as no. 11 in the Collection

of Decisions of the Constitutional Court of the CSFR). Therefore, the

principle of equal rights must be understood to mean that legal

differentiation between legal subjects in the access to certain rights

may not be an expression of arbitrariness; however, it does not follow

that everyone must be granted every right.”
 
The Constitutional

Court generally interprets the principle of equality from two points of

view (see, e.g., judgments file no. Pl. ÚS 16/93, file no. Pl. ÚS 36/93,

file no. Pl. ÚS 5/95, file no. Pl. ÚS 9/95, file no. Pl. ÚS 33/96, and

file no. Pl. 9/99, and others, published as no. 131/94 Coll., N 25/1

SbNU 189, no. 132/94 Coll., N 24/1 SbNU 175, no. 6/96 Coll., N 74/4 SbNU

205, no. 107/96 Coll., N 16/5 SbNU 107, no. 185/1997 Coll., N 67/8 SbNU

163, no. 289/99 Coll., and N 135/16 SbNU 9). The first comes from the

requirement of ruling out arbitrariness in the legislature’s actions

when differentiating groups of subjects and their rights, the second

from the requirement that the factors for differentiation be

constitutionally acceptable, i.e. the impermissibility of affecting one

of the fundamental rights and freedoms by differentiating subjects and

rights on the part of the legislature. Although the postulate of

equality does not give rise to a requirement that everyone be generally

equal to everyone else, it does give rise to a requirement that the law

not give an advantage or disadvantage to some persons over others

without justification. Thus, the Constitutional Court accepts a

statutorily established inequality, provided that there are

constitutionally acceptable reasons for it. However, in my opinion,

there are such reasons for the inequality found by the judgment. In any

case, special provisions of the Charter related to pension insurance do

not speak of equality, but proportionality, and they mean social

proportionality, not maintenance of the previous standard of living. In

my opinion it is difficult to require something like that from a basic

pension system. Maintaining a standard of living is a question of

additional, contractual insurance. Everyone must take care of that

himself, using his own resources. The state cannot be asked to guarantee

this. The state creates certain conditions for it, and supports

supplemental pension insurance or savings, but, in my opinion, it cannot

in a system of basic pension insurance, in addition to adequacy, also

guarantee maintenance of a person’s previous standard of living.
 
Of

course, in pension insurance it is a question whether it is even

possible to thing about equality this way in connection with equivalence

of the insurance contributions and the allocated pensions (in contrast,

it is a question whether granting the petition would not mean

establishing impermissible inequality between pensioners whose pension

was allocated in a reduced form under the existing rules and “new”

pensioners). There is an unknown in the equality model that was

completely overlook in the reasoning of the judgment. That is the fact

that it is not, and cannot be, know in advance how long a particular

pensioner will draw the allocated pension. The difference between the

length of time that a pension is drawn could ultimately lead to

completely reversing the equality thus understood. The “high income”

persons who made contributions several times higher, could, even with

the existence of reduction limits, as a result of drawing pensions for a

long time, considerably over-draw their theoretical share based on

their contributions to a pension account. And, in contrast, the “low

income” persons, who draw their pension for only a short period of time,

will receive from the system only a small part of what they were forced

to contribute to it. Following the petitioner’s thinking and the

construction of the judgment, the present system for allocating pensions

is then, in contrast, unfair to these insured persons.
 
Nonetheless,

I consider considerations of the equality of “high income” and “low

income” insured persons to be a conceptually defective category. It is

the same as if a member of the generation of present contributors

criticized the existing system of pension insurance on the grounds of

inequality, stating that, as a result of a lower birth rate and

increasing average age, he is forced to pay higher contributions (or pay

a social tax) than his parents. The essence of the entire system is

based on solidarity, as stated in the judgment. Nonetheless, it is not

only solidarity of the poor with the rich and the young with the old, or

the healthy or less ill with those more ill, but of everyone with

everyone. In the case of pension insurance, as I stated above, it is

never certain in advance to what extent a particular individual will

burden the system. Therefore, as a result we can argue that under

certain circumstances “high income” individuals can draw a pension only

due to solidarity with the “low income” persons. Yet a petition from

persons in this income category alleging inequality would be considered

absurd.
 
I believe that the pension insurance system, especially

if it is based on pay as you go financing and not a system of individual

accounts stands and falls with this broadly conceived principle of

solidarity of everyone with everyone (and I emphasize that). The system

of health insurance and reimbursement of “drawn” health care is set up

analogously. Everyone contributes to the system as much as he is able,

how much he can, without being disproportionately burdened. And, in

contrast, in case of need, he receives from the system only as much as

he needs. It is clear in advance that there may not be, and probably

will not be, a balance between the contribution and the drawing of

benefits. Yet nobody would think of differentiating between the

fundamental care provided so that it would be equivalent to the level of

contributions made.
 
In addition, we cannot overlook the fact

that the Constitutional Court, in its judgment file no. 12/94 (č. 92/95

Coll., N 20/3 SbNU 123), to which the Ministry of Labor and Social

Affairs refers, when evaluating the petition from a group of deputies

from the Chamber of Deputies of the Parliament of the Czech Republic

seeking the annulment of certain provisions of Act no. 589/l992 Coll.,

on contributions for social security and the contribution to state

employment policy, as amended by later regulations, took as its starting

point the position that in all existing social security systems the

principles of solidarity and equivalence are represented in varying

degrees. Every system of social security carries advantages or

disadvantages for certain social groups, depending on whether it gives

preference to the viewpoint of solidarity or the equivalence principle.

This regulation is reserved to the legislature, which cannot act

arbitrarily, but, when setting the preference, must take into account

the public values pursued. In the area subject to review, an area of

economic legislation, the legislature has considerably wider discretion

than in laws that directly affect the fundamental human rights and

freedoms. The essential thing is that the Constitutional Court has

already adopted the position that the ratio of solidarity and

equivalence in a social security system is reserved to the legislature.

Of course, the judgment now adopted rejects that conclusion.
 
Our

pension system objectively has no relevant reserves for fundamentally

influencing the degree of the individual replacement ratio for persons

with long term higher incomes. Any increase in pensions of one of the

income groups must necessarily lead either to decreasing the pensions of

other income groups, or to placing the system in debt, or to increasing

social taxes, which, of course, would again affect primarily the high

income groups. We can rule out in advance the possibility of reducing

pensions, because a right once granted cannot be taken away (I am not

taking into account a situation of impending or actual state

bankruptcy). Long term indebtedness of the pension system is likewise

not possible, because it would necessarily lead to disrupting the

stability of the public finances, which follows from the abovementioned

nature of our pension system, which is tied to the state budget. Thus,

there is only economically realistic possibility for creating a material

base for increasing pensions, and that is increasing contributions.

However, such a step necessarily raises the question whether this will

not simply replace the tension between economically active and inactive

persons by tension between persons divided by income level (and

contribution to the system). This could be a dangerous test for

preserving a wide degree of inter-generational solidarity.
 
 
  
Dissenting Opinion of judge Jan Musil

 

I

disagree with the verdicts and the reasoning of the judgment of the

Plenum of the Constitutional Court of 23 March 2010, file no. Pl. ÚS

8/07, which annulled § 15 of Act no. 155/1995 Coll., on Pension

Insurance, as amended by later regulations.
 
Under § 14 of Act

no. 182/1993 Coll., on the Constitutional Court, as amended by later

regulations, I am submitting the following dissenting opinion to the

judgment, reasoning as follows:
 
1. By its decision in this

matter the Constitutional Court violated the generally recognized

principle of the constitutional judiciary, the principle of judicial

self-restraint. This principle means that the Constitutional Court

should fundamentally refrain “from ‘conducting politics,’ i.e.,

interfering in the constitutionally created and defined discretion for

political formation, ... which the constitution guaranteed for other

constitutional bodies” (see, e.g., judgment of the German Constitutional

Court BVerfGE 36, 1, 14).
 
2. I want to emphasize that I

consider it possible in principle for the Constitutional Court to review

whether the statutory framework of social rights guaranteed in Chapter

Four of the Charter of Fundamental Rights and Freedoms (the “Charter”),

is consistent with constitutional regulations. However, I maintain that

this review of constitutionality in the area of social rights is

limited, and characterized by a number of specific features. The

Constitutional Court itself has repeatedly pointed to these specifics in

its case law.
 
3. The following these appear in several Constitutional Court judgments (see, e.g., judgment file no. Pl. ÚS 2/08):
 
*

a defining element of social rights “is the fact that they are not of

an unconditional character and can be claimed solely within the bounds

of statutory law (Art. 41 par. 1 of the Charter). This provision gives

the legislature the authority to set forth specific conditions for the

enjoyment of social rights” (point 52 of the cited judgment);
 
*

social rights “are dependent in particularly on the state’s economic

situation. The level at which they are provided reflects not only the

state’s economic and social development, but also the relationship

between the state and the citizen, founded on mutual responsibility and

recognition of the principle of solidarity” (point 53 of the cited

judgment);
 
* “benefits provided as part of social rights come

from the state budget, and responsibility for them rests completely on

the state. If it is the state that is and will be bound by social

benefits, then it must also have the opportunity set specific conditions

for such benefits” (point 54 of the cited judgment);
 
* “the

Charter not only reserved to the legislature the implementation and

determination of conditions for the abovementioned constitutional

rights, but at the same time it delimited enjoyment of these rights in

the constitutional text through the terms … ‘adequate material security

in old age’ etc. In view of the fact that the Charter does not more

closely specify the content of these terms, it is evident that

delimiting them, like setting other details, is left up to the statutory

framework” (point 55 [sic, 59] of the cited judgment);
 
* “the

content of this state obligation is to secure for the subjects of these

rights a certain minimum social standard, and not an adequate standard

of living in accordance with their requirements, as these subjects

sometimes erroneously believe and request” (point 60 of the cited

judgment);
 
* “interference by the Constitutional Court in

similar matters could come into consideration only in case of flagrant

willfulness, arbitrariness, and lack of reasonableness by the

legislature” (statement of law in judgment file no. Pl. ÚS 1/08).
 
The

present judgment is in conflict with these previous valid legal

opinions; thereby it also comes into conflict with Article 89 par. 2 of

the Constitution of the CR, under which (previous) enforceable decisions

of the Constitutional Court are binding on all bodies and persons

(including the Constitutional Court itself).
 
4. Of course, I

agree with the these stated in the present judgment (point 83), that the

Constitutional Court has jurisdiction to review whether the legislature

has respected Article 4 par. 4 of the Charter, under which, in

employing the provisions concerning limitations upon the fundamental

rights and basic freedoms, the essence and significance of these rights

and freedoms must be preserved; the legislature “may not deny or annul

constitutionally guaranteed social rights.”
 
5. The

Constitutional Court may undoubtedly also review whether the legislature

has respected the principle of equality enshrined in Article 1 and

Article 3 par. 1 of the Charter.
 
6. I also want to add that I

consider it possible for the Constitutional Court to review whether the

legislature, in regulating social rights, did not violate the principle

of human dignity enshrined in Article 1 of the Charter and in the

Preamble to the Constitution of the CR. A problem like this was

reviewed, e.g., by the German Constitutional Court, which, in its

judgment “Hartz IV” (BVerfG, 1 BvL 1/09 of 9 February 2010), stated that

the valid German legal framework for social benefits paid to unemployed

persons and their minor children does not guarantee a dignified minimum

standard of living and does not respect the principles of a social

state, whereby it violates Article 1 par. 1 and Article 20 par. 1 of the

German Constitution.
 
7. I believe that in the present case none

of the cited reasons for which the Constitutional Court could annul the

contested § 15 of Act no. 155/1995 Coll., on Pension Insurance, were

met. I do not consider the conclusion stated in judgment Pl. ÚS 8/07,

that this statutory provision violated the principle of equality

enshrined in Article 1 and Article 3 par. 1 of the Charter, to be

convincing.
 
8. By reviewing “whether the ratio between the level

of income, premiums for pension insurance, and the level of pension

under the existing legal framework meets the constitutional requirement

of “proportionality” of material security in old age … and does not

establish the claimed inequality between participants in pension

insurance” (point 34 of the judgment), the Constitutional Court stepped

into the territory of social policy, decisions on which are reserved

only to the legislature. The reviewed level of the calculation base

(including the “personal assessment base” and “reduction level”) is an

integral part of the entire system of mutually interconnected and

balanced elements, which also includes, e.g., the extent of inclusion of

individual replacement periods, method of determining average income

for the decisive period, including indexation and reduction, the

percentage rate from the measurement basis for each full year in the

insurance period, retirement age, the institution of a supplemental

period, etc. In this review, it is necessary to constantly keep in mind

the total balance of income and expenditures of the pension system. It

is completely impossible to evaluate all these questions without

specialized knowledge of demographics, statistics, insurance

mathematics, etc., which, of course, the Constitutional Court does not

have.
 
9. Regarding the basic principles of the entire social

system, e.g. the degree of inter-generational solidarity, the widest

possible social consensus must be achieved, created primarily in

democratic political discussion.
 
10. It is obvious that if the

old age pensions of citizens in the highest income group (i.e. the

richest) are increased, and if a balance of income and expenses is to be

maintained, then either the income of the pension system must be

increased (e.g., by raising contributions or through increased subsidies

from the state budget, which will lead to an increase in the state

deficit), or the pensions of citizens in the lower income groups must be

decreased. One must act exceptionally responsibly in such immensely

sensitive questions, affecting the state budget policy and the problems

of social stratification, otherwise there is a risk of heightening

social conflicts.
 
11. I add that I also fully agree with the

arguments presented in the dissenting opinion of judge Jiří Nykodým, and

refer to it for the details
 
For all the foregoing reasons I

believe that the contested provision of Act no. 155/1995 Coll., on

Pension Insurance, as amended by later regulations, is not inconsistent

with the constitutional order of the Czech Republic, and that the

petition should have been denied under § 70 par. 2 of the Act on the

Constitutional Court.