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The Czech Republic is facing a population-ageing phenomenon, and its demographic structure is expected to change dramatically, which might have a significant impact on the Czech economy. This paper analyses the potential effects of the expected demographic changes on aggregate economic performance taking into account alternative fiscal policy setups. Furthermore, it provides a rough estimate of the amendments necessary on the revenue and expenditure sides in order to keep the current system financially balanced.

Based on the running scenarios, the paper demonstrates the following expectations for the next 50 years:

• the aggregate employment will fall by 10% to 20% compared to the 2008 levels
• as labour becomes scarce, capital demand will drop in line with the development of aggregate labour supply
• consequently, either the domestic real interest rate will adjust downwards, or a part of the domestic capital stock will be exported abroad
• foreign assets will increase within the range of 50% to 100% due to demographic factors

The paper finds that the main driving forces behind its results are primarily affected by the expected deterioration of the demographic structure. Yet, alternative assumptions concerning the type of pension system and the retirement age threshold do affect the outcomes of its analysis. However, the overall impact of demographic changes will not be eliminated.

Under those circumstances, the paper concludes that:

• the impact of population ageing seems to be higher when the current "defined benefit pension scheme" is assumed
• the impact of ageing is lower when one assumes a "defined contribution pension scheme", which has lower generosity

The paper shows that in the second case, individuals would be motivated to supply more labour and save for the later stage of life.

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