The Polish pension system in comparative perspective

1. Introduction

Pension systems constitute the key element of modern welfare states. They epitomise current dilemmas of social policy — what kind of balance between public, private and voluntary sectors should be struck? How should demographic challenges of contemporary Western societies be dealt with? Considering the increasingly competitive environment of today’s global market is there a place for the comprehensive publicly managed and publicly provided pension benefits? What role should the European Union play in the field of pensions? Is the Anglo-American pension model on the rise?
After 1945 Poland developed a pay-as-you-go ‘one-pillar scheme’, where current benefits were covered by currently collected premiums (European Commission 2003:40). Benefits were low due to the fact that management of pension insurance premiums was extremely inefficient. Additionally, the post-war pension system was clogged with inconsistent and ill-defined rules of premium calculation (Šuszczewski 2000:1). Last but not least, benefits were not linked to earnings of the insured persons. In the late 1980s the pension system came under increasing strain. The number of people paying the contributions went down dramatically because of the growing unemployment. At the same time the number of pensioners and recipients of the pre-retirement benefits increased. Due to lax fiscal policies real pensions (in proportion to earnings) grew considerably. The share of GDP consumed by pensions and disability benefits exceeded 15% in the early 1990s. The extrapolations showed beyond doubt, that if this is to be continued the expenditure for pensions will grow to 22% in 2035.
The communist social policy model has been categorised as the ‘state-collectivist’ or the ‘bureaucratic-collectivist’ welfare state (Deacon 1993). It has also been described as ‘an antiliberal, etatistic, hierarchic socialist policy mix with conservative elements (Księżopolski 1999:117). In recent years Poland has undergone far-reaching economic reforms. The old ‘soviet’ model of welfare state was gradually dismantled giving way to free market economy. The overhaul of the social security system was meant to make it compatible with a free market. During the 1990s subsequent governments experimented with social policy instruments that had been used in Western Europe after World War II. In the context of ongoing economic restructuring it was extremely difficult for the authorities to keep up high social security standards.1
On December 16, 1991 Poland signed ‘the European Agreement’, the treaty establishing association with European Economic Community. The agreement provided for approximation of legislation with the Community law and co-operation — among others — on improving standards of health and safety at work, labour market policies and the modernisation of the social security system. The Polish accession was seen as part of an historic process, in which countries of Central and Eastern Europe overcome the division of the continent, which had lasted more than 40 years, and join the area of peace, stability and prosperity created by the Union. Putting lofty ideas aside, the ten-year period that followed turned out to be a long and painstaking process of reforms. Although the Polish pension system was not a part of the acquis communautaire, the European Union — as it will be shown in the following paragraphs — was not without influence on the course of reforms in Poland. In the field of pensions Poland co-operated with other international organisations as well — the International Labour Organisation and the World Bank.
Some experts, when referring to the global debate over pensions, characterise the ongoing discussions as a ‘new Cold War’ between the Anglo-Saxon model2 and traditional European model, favoured by the International Labour Organisation. Thanks to the activity of the World Bank and the International Monetary Fund the reform agenda advocating pension privatisation moved from ‘a radical idea to a mainstream, global policy prescription’ (Kay 2000:192). Throughout the 1990s the Polish authorities have been urged by the World Bank to adopt the ‘liberal’ pension model, advocated by this organisation3. Along with policy prescriptions there came institutional and human resources to assist the Polish government. On the other hand, the long tradition of co-operation with the ILO made the Polish government wary of social risks that radical, neoliberal prescriptions entail.
In this article, we set out to provide the reader with a brief outline of the pension reform of 1999 in Poland and put it in the international perspective.

2. Pension reform in Poland

The system of social insurance in Poland covers all the insurable social risks such as old age, disability, sickness and maternity as well as accidents at the workplace and occupational diseases. Benefits are financed from the contribution-based Social Insurance Fund (Fundusz Ubezpieczeń Społecznych), which is managed by the Social Insurance Institution (Zakład Ubezpieczeń Społecznych).
Practically speaking, discussions have been in place in Poland since the early 1990s about the very possibility and rules on the basis of which the Polish pension system would be reformed. The first democratic governments (both right- and left-wing) lacked the courage to introduce the necessary reforms in the scope of pension insurance. As late as 1997, when a coalition of parties with the Solidarity movement was in power, it became clear that one of the major tasks of the new government would be the introduction of a pension reform. In general two options were considered. The first one assumed the introduction of very slight changes, which would deprive certain social groups of separate pension rights. Such a path of reform would not entail, however, a fundamental restructuring of the system. The other option assumed the introduction of a totally new system based mainly on the privatisation of the pension system (based on the Chilean model). Finally, however, new rules were developed combining both the existing experiences and the introduction of elements of the private management of contributions.
On January 1, 1999 a new pension system was born4. The main objectives of the overhaul of pensions were to provide fiscal sustainability and create economic externalities. In terms of fiscal stability more important than short-term balance was to lay the foundations for long-term financial viability. Thanks to the new system, the liabilities of the public sector will have been reduced by 268% by 2050 (Pater 2005). As for the positive economic externalities, the new system was to be conducive to a proper functioning of capital markets (saving and capital stock effects) and employment sphere (Pater 2005). The actuarial link between contributions and benefits has been strengthened. In compliance with recommendations of the ILO the reformed Polish pension system is based on the following pillars:
1. a compulsory pay-as-you-go, defined-benefit pension,
2. a compulsory, capitalised, defined-contribution pension — the so-called ‘Open Pension Fund’,
3. voluntary retirement savings and non-pension sources of income.
Contrary to the ILO recommendations, there is no means-tested tier, which would be financed from the general revenue. Old-age citizens who have no required contribution period can apply for the general social assistance benefit. The public pension from the first pillar is a prevailing source of income security in old age.
Currently, pension rights of citizens are dependent on age of the insured person. The Second pillar is obligatory to persons born after January 1, 1969. People born between January 1, 1949 and December 31, 1968 are free to choose between the old and the new system (whether to be included in or excluded from the Open Pension Fund). Those who have been insured before the reform were given a lump sum of the so called ‘initial capital’ to be added to their newly established individual accounts. On retirement, the amount of money on their account will be divided by the life expectancy for a person at that age. Citizens who were born before 1949 are paid their pension benefits according to the rules that existed before the pension system was overhauled in 1999.
The Social Insurance Institution transfers resources (1/3 of workers’ contributions) to the Open Pension Funds, which are run by private companies (the second pillar). The insured persons are given a possibility to choose from the list of Open Pension Funds operating in Poland5. In 1999, 21 funds were established in Poland by the world and Poland’s biggest financial institutions. Very soon it appeared, however, that the three largest funds own more than 65% of the total fund assets (Pater 2005). The pension component of the Social Insurance Fund is financed out of contributions made by the employers (9.76% of taxable income) and insured workers (9.76%). The contributions of workers who are covered by the second pillar are split between the Social Insurance Fund and the Open Pension Fund. From 2004 to 2010 contribution charges levied by the Open Pension Funds must not exceed 7% of contributions paid. From 2010 to 2014 this ceiling will be gradually lowered from 6.125% to 3.5% (Pater 2005). The insured have been guaranteed a minimum rate of return of their assets. The Social Insurance Institution established a new data registration system, where premiums are registered on the insured persons’ individual accounts.
The third pillar, being an optional form of pension insurance, constitutes not only private individual savings accounts but also occupational pension schemes for workers. As all these voluntary schemes are not accompanied by tax incentives, they play a marginal role in Poland6.
The minimum contributory period is 20 years for women and 25 years for men. The pension age is 60 and 65, respectively. If the condition of the minimum contributory period is not met, the pension benefits actually paid are not covered by the minimum income guarantee. Pension benefits are taxed as other sources of income. Since 1999 the indexation of benefits has been based on the mixed price-wage formula (minimum indexation should cover inflation plus 20% of wage growth) and annually defined in the state budget law. The minimum amount of pension benefit is set at the level of minimum wage for workers and 60% of the average income for self-employed people.
Apart from the general pension system in Poland there are special provisions for people with work incapacity or the bereaved family members. Since 1999 they have been divided into separate social insurance schemes with separate contributions. In order to obtain the right to disability pension one has to meet the following requirements:
• he or she must be diagnosed as partially or totally unable to perform work,
• he or she must have worked the necessary contributory period,
• work incapacity must have occurred in a period covered by the insurance.
People who are declared unable to live an independent existence are additionally granted a nursing supplement. Those on disability pension who are by doctor’s declaration able to acquire new professional qualifications are granted a special training pension, which is payable for six months. Family members, who are bereaved by a person who at the moment of his or her death was in receipt of a pension or a disability pension are entitled to survivor’s pension. If necessary, the survivor’s pension is distributed among all the eligible family members. As a rule the benefit amounts to 85-90% of the pension to which the deceased was eligible.
On May 29, 1999 the Polish Pension Funds Chamber, a self-regulatory economic body representing pension fund societies, was established. Its main role is to ‘strengthen public trust (confidence) in the new pension system that closely links a retirement pension with the amount of contributions’ (Łuszczewski 2000:6). The Chamber represents joint interests of the Pension Fund Societies, which manage Open Pension Funds in their dealings with the government at central and regional level. In 2003 the Chamber joined the European Federation for Retirement Provision7.
Certain groups were excluded from the general system of pension insurance. This applies to miners. An amendment to existing regulations was introduced, so that the miners were accorded far-reaching privileges. Its entry into force in 2005 was preceded by a fierce debate about whether certain professional groups should be treated more favourably. Some experts pointed out that if the state is to award special status to some pressure groups the sense of the entire pension reform in Poland would be undermined. Additionally, as the future will probably show, this will pose a threat of an increase in budget deficit. This is especially important given the fact that farmers already take advantage of a separate system in Poland.

Maciej Duszczyk: Deputy head, department of economics, ministry of european affairs, Warsaw.
Jakub Wiśniewski: Department of Economics, University of Warsaw.
1 During the early 1990s Poland and other postcommunist countries were not that unique in experiencing structural problems leading to reorganisation of the welfare state. The developed countries were afflicted with a painful process of transformation to the ‘postfordist’ model of capitalism. With mass production companies in crisis, markets for mass-consumer durables saturated, social security systems came under financial strain. In response to the welfare crisis the social policies underwent significant reforms embracing the arguments of the New Public Management proponents. Mots de jour were ‘market-type mechanisms’ in social policy (quasi-markets, vouchers, user fees, etc.). Another facet of the ideological shift was a shift from ‘nanny state’ towards ‘workfare state’ (Millar 2003).
2 The liberal British welfare state regards the role of the public sector as extremely limited to the regulation of the (private) pensions industry. Public activity is restricted to provision of the low-level, means-tested, non-contributory state pension for the low-income groups of population. recently, many countries have followed a similar route. Even if the liberal policies are not observed to the letter an important degree of marketisation of provision and individualisation has taken place.
3 Poland was the subject of the study conducted under Michał Rutkowski, a Polish expert working for the World Bank, and published in the form of the monograph entitled Poverty in Poland (World Bank 1994).
4 This is the date when the Act on pensions and disability pensions establishing the Social Insurance Fund of December 17, 1999 (Journal of Laws, No. 162, item 1118) came into force. It is important to point out that the new system did not cover farmers who received their pensions through separate scheme, managed by the Social Insurance Institution for Framers (Kasa Rolnicznego Ubezpieczenia Społecznego — KRUS).
5 The necessary requirement for the Open Pension Funds to operate is the well-developed financial sector (capital market). Throughout the 1990s there have been important changes in this respect leading to the introduction of free-market economy standards.
6 Employers who set up occupational schemes in their companies are only entitled to deduct 7% of earnings when calculating the base for social insurance contributions (European Commission 2003:40).
7 The European Federation for Retirement Provision represents various national associations of pension funds and similar institutions for pension provision. Its aim is to ‘provide Europe with a financing vehicle (pension fund or similar) — not precluding any others catered for by commercial undertakings — that is affordable for a large section of the population and that provides a degree of intra- and inter-generational solidarity (European Federation for Retirement Provision 2003).

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