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Vladimír Pikora: I consider the biggest risk today to be government debt and politicians' efforts to find money…

Pension reform, politicians' incompetence, the robbery of ČEZ shareholders and many other interesting topics will be discussed in an exclusive interview with economist Vladimír Pikora.

Can you introduce yourself to our community?

My name is Vladimír Pikora. I received my PhD in economics from the University of Economics in 2007.
I have been an economist, analyst and publicist all my life. I was the chief economist of Volksbank CZ, then co-owner of the Next Finance analytical house and today I am the chief economist of the CFG investment group. In addition, I still work at Pikora Invest, an asset management company, and teach at the University of Economics. I have written about eight
or nine popular books on economics. Among them, one book of financial literacy tales and two on pension reform. In addition to that, I've written an estimated over a thousand popular economics articles. I have written regularly for Reflex magazine for six years and have seven children.

First of all,I'd like to discuss one of your articles that caught my eye.
It's aboutChina starting to die out. Itcan teach us how to deal with pensions.
What exactly can it teach us? Or rather, how to deal with

That's just it. We in Europe don't know how to deal with pensions. Broadly speaking, there are four
solutions and nobody likes any of them. Then there is a fifth solution, and that is not possible under the expanding
power and influence of the state.

What is it? We can save the pension system:

(a) by increasing the pension contribution

b) by raising the retirement age

c) by reducing pensions

The government just mentioned 68 as the retirement age and there was a big problem. Then it slowed down the indexation and the same thing. I can't imagine what would happen if someone mentioned reducing pensions. In other words, we know what the equation tells us, but we don't have the political power and the societal consensus for a solution. Another solution is a demographic shift. In theory, we would need more children quickly. Practically, we are not going to do that overnight. We will find it difficult to persuade young families to have three or more children at the same time. That can be solved by immigration. It's already here from Ukraine. The question is whether Ukrainian children will stay here. But people are protesting against immigration too. But probably less than against retirement at 68. Another solution is to increase productivity. That's the problem. Europe has been losing its breath for years. Asia and America are growing faster. We keep inventing new bureaucracies, government intervention and green policies that are expensive and take the economy's breath away. This means that we will not get fewer workers to feed more pensioners. This is something where I would like to take inspiration from China.

So are we in a similar trend to China in terms of lower birth rates while more people are getting older and approaching retirement age?

We are broadly similar, but China is much worse. The
one-child policy is taking a frightening toll. China is facing hundreds of millions of retirees who
will have no one to work for. I think China is going to be tough. It will take a combination of all
the steps I mentioned. I'll be curious to see how they handle it. They have been very original in recent years. Maybe there will be somewhere to draw inspiration from, or they will show how a dictatorship can enforce something that a democracy can't.

Where do you see the problems in our country at the moment?

Everywhere, actually. I see the biggest problem as the fact that governments have done little to make households earn more in recent years. We see that we have a large number of people who earn so little that they cannot save.

There are various studies that show different results, but we often read that a quarter of families do not save anything at all. Those who do not save anything will have a very meagre pension. I have heard from politicians that they will build this or that, they will put x billion more into the army, they will draw x billion more from European subsidies, but they say nothing about how they will raise the average wage. And by that I do not mean that they will invent some new tax deductible item and other such nonsense that will make the tax system less transparent.

Theaverage wage is ridiculous in this country because we are an economy where we don't value
education. We live off assembly plants and warehouses. That's pretty primitive. I suppose now
with the change in energy prices, the economy will gradually change and the structure will
become more modern, which I welcome. There is also more and more talk about research and development. That is key. We need roughly double the wage at
current prices. Then people would save and
have something to live on in retirement.

The second terrible mistake is that the state has dramatically increased the number of its employees and civil servants in recent years. This has sucked skilled people out of the job market, so we can't even develop higher value-added industries. That is why tens of thousands of people need to be laid off from the civil service and let go to corporations.

Making them all work for the state will not move us forward. Political non-profits won't move us either. What we need is a modern economy where humans work with robots and artificial intelligence to sharply increase productivity. We would need three times as many industrial robots alone as we have today.

And because we don't have high productivity, fewer people won't be able to feed more
retirees. The idea that we'll impose higher taxes, which is what we're seeing today, will move us
towards more and more people not having enough money to invest.

So stop higher taxes. It follows that to get the public finances in good shape, we need to dramatically cut government spending. That means stop subsidies.

But today's left-wing skewed economy is based on subsidies. So we do not invest in the most efficient projects, but in the projects best subsidised by officials. This
needs to stop. But this is not a problem for the Czech Republic, but for the EU as a whole.

Why am I even biting this topic - Petr Fiala said that they are planning to do pension reform. How will this be achieved?

I think I have bitten the bullet. While today's politicians, not one of whom
is an economist, which is tragic, will be squabbling over whether to retire at 67
or 68, I would focus on the fifth point, which is productivity and hence
average wages.

That's a longer story. There is a need for a long-term vision here. But I don't see that in the current
politicians. If we did see it, it would not be whether we make two VAT rates out of three, but change them only marginally. And all this with the mantra that we will simplify the
system. If someone wanted to simplify the system, they'd make the rate one and
wouldn't tax bottled water differently from tap water. In other words, there are too many steps.

But I don't see a politician who understands them or even wants to enforce them. That would
mean freeing the economy from nonsensical measures like the fact that from
next year companies will face non-financial reporting, with auditors measuring their carbon footprint, gender equality and the public good in general. Anyone who raises their hand for this doesn't want an efficient economy or high average wages. A Europe with the current bureaucracy will be expensive, backward and understandably poor.

Turning this over to the younger generation, say around 18, do you think
they should even count on living to see any pension or that it will be at
a level to cover their living costs?

Even Otto von Bismarck introduced a pay-as-you-go system that still works today. It will continue to work. Unlike other systems, it cannot be robbed. So the young will pay for the old. But the system will look a little different. It won't play the fictitious retirement account game. Everything will be funded through tax.

Furthermore, politicians are already saying that it is not possible for there to be such a big difference in pensions and
are fighting for poor pensioners who will be valorised more. So I believe that the current system will be replaced by an equal pension. Everyone will have the same
"begging bowl".

It will not look at the number of years of service, it will be enough if there are more than
40, it will not look at the amount of contributions, etc. But this benefit will be low. Today,
pensions are close to 50% of the average wage. It won't be enough. I wouldn't be surprised to see 25%.
It's all about survival. That's all this system can do with the current demographic

So the state will actually take care of it, but it won't be worth a damn, so to speak. So could it be said that relying on the state and a ''decent'' pension doesn't make much sense?

Yes, the state will take care of it, but it won't be to live a decent life. That's why everyone has to invest.

So it is clear that young people should take their future into their own hands. What should an investor look for if they are planning to save for retirement?

Of course. Let's not look to the state for help, but to ourselves. Those who do not invest will
have a very difficult life. You have to invest. But I think the big push for
investment funds where your employer contributes is a mistake. I think it's perverse. If
your employer is giving you a raise, then they can give you a raise right away and you could invest in whatever you want. I think it has been far more interesting to invest in your apartment or house than in funds over the last 20 years. The obsession with funds is bad.

I would try to make sure people have a maximum wage and make their own investment decisions
. I see it as a problem that an entire company would invest in about 10
funds. What if one fund goes under? Suddenly a tenth of the people lose their pensions? I think
investing requires much more diversification.

I see the biggest risk today as government debt and politicians trying to find money somewhere at any cost. What they did to the shareholders of CEZ was outrageous. Rather than give a nice dividend to the shareholders, the state, as the major shareholder, would rather do a huge tax. This is nothing but robbing the investor.

So the state is robbing its own people. These investors are not some ugly wolves from Wall Street, but often small investors who voluntarily save for their retirement in CEZ. In other words, those responsible have been tapped on the knuckles. That's why I recommend not only looking for the most profitable investments, but especially looking for diversification in case the politicians come after you and want to take something away.

That's why, in addition to real estate and stocks, I recommend bonds and gold to everyone. Just diversify. It may seem like a silly thing to do for a few years, but CEZ is a good example. For many years it was, in my opinion, the best Czech stock and politicians destroyed it. I see the salvation in having money in many piles and not one.

  • Did you enjoy today's interview? If so, don't forget to follow us, my guest today was Vladimír Pikora.

Please note that this is not financial advice.