The Polish pension system in comparative perspective

3. Persisting challenges to the Polish Pension system

The social security administration in Poland is increasingly being run on business principles with an emphasis on efficiency and targets, not with less attention to effectiveness in meeting individual need (Walker 2001: 139). Although the reformed pension system undoubtedly pushes the fundament of the social security system in the desired direction, some important questions arise.
First, it is not clear whether the new pension system is ‘work-friendly’ enough. Given the structural problems, the top priority for the Polish social policy must be promotion of gainful employment. The new normative vocabulary embraces notions such as ‘employability’, ‘life-long learning’, ‘activation’, ‘make work pay’ and ‘welfare to work’ (Hemerijck 2002:12). One of the key challenges to the Polish labour market policy is to ensure employment opportunities for older workers. Thus the scope of co-ordination between social protection and employment provision must be widened. Proactive policies are needed to raise the employability of older workers through such measures as part-time retirement or tax allowances for older workers.
The incentives to retire as early as possible, well entrenched in the old system, were eliminated. After 1999 the amount of benefit paid is directly linked to contributions. In the old system numerous categories of employees were entitled to an earlier old age pension. This applied to people at the pre-retirement age who were declared to have disability or who have worked in special conditions or performed work of a special nature as laid-down in specific ordinances of the Council of Ministers. The post-1999 legal framework drastically limited the possibility of earlier retirement (although certain professional groups such as miners retained their privileged status with lower retirement age). Moreover, farmers’ and miners’ pensions are run separately from the general system.
Second, there is a problem of adequacy. The replacement rate of benefits has been on the decline, lately. In 1995 average retirement pension was 69.2% of average national wage, in 2001 decreasing to 61.8% (European Commission 2003: 44). The old pension system redistributed incomes of pensioners extensively so that the risk of social exclusion for low-income pensioners was largely avoided. It was a benefit-defined scheme, whereas the new system is built upon the contribution-defined scheme principle. ‘For defined contribution schemes, risks arise that contributions, and the return thereon, may be insufficient to provide an adequate income in line with the expectations of contributors and the Laeken objectives’ (Social Protection Committee 2005: 9).
Does the new system prevent widespread poverty? What level of resources will have to be available form private sources to make up for insufficient income from public resources? It remains to be seen whether pension benefits in the new system will provide people in the old system with adequate income in the old age. Some forecasts predict that replacement rates in the obligatory schemes (the first and second pillars) will go down to 50-60% (European Commission 2003: 45). First pensioners to receive their benefits from two sources (i.e. Social Insurance Institution and Open Pension Fund) will reach their retirement age in 2011. A lot depends on the profits of the private insurance companies who run the second pillar. They are partly connected to such external factors as the general condition of the capital market in Poland, which is in turn influenced by the global processes.
Preliminary calculations suggest, however, that the first and the second pillars will not be sufficient to reach income above the poverty line. It seems that the government does not pay sufficient attention to inform the public about the necessity to buy private insurance in the third pillar. Coverage and contribution levels to private pensions do not seem to be developing sufficiently well to prevent an adequacy gap. Given the rampant social exclusion in today’s Poland8, there are risks that people who could not afford private pension insurance are left to themselves in the old age. At the other end of the equation there are budget liabilities which must be met. If the new system continues to be ‘spoiled’ through concessions to pressure groups, Poland will be at a risk of destabilisation of the public finance system. A big chunk of the labour force (mainly farmers) is not covered with the new pension system, which can be questioned on grounds of social equity, economic efficiency and institutional transparency.
Third, in the next decades growing demographic tensions will put the pension system under increasing strain. At present, in terms of financial liabilities of the pension scheme the demographic structure in Poland looks favourable. In 30 years’ time, however, the dependency ratio will grow from 24 in 2000 to 41 in 2030 (European Commission 2003: 50). Poland should build up pension reserve funds in order to maintain adequate pension provision for the post-war baby boomers in 20-30 years’ time. Demographic problems apart, the family model in Poland has evolved rapidly in recent years. The three generation household model has been on the decrease. This is why the pension system must not inhibit policies aiming at reconciliation of work and family life9. The calculation of benefits should allow for interrupted working careers of women to avoid penalties for deactivation periods caused by childcare responsibilities.
Fourth, there is an issue of viability and sustainability. Is the new system financially stable? The pension reform has been dear (costing around 1.5-2% of GDP annually in recent years). The severe transitional costs are connected with the necessity to finance current benefits and at the same time to direct part of contributions for the pay-as-you-go to the Open Pension Funds10. It is hoped, however, that once the transitional period has passed the pension system will operate on a more sound financial footing. It must be emphasised, however, that no sustainable pension system will work smoothly unless the employment rates for men and women are raised, in particular for older workers. In view of the current macroeconomic context the role of people who have interrupted careers will be growing. In future, measures will be required to improve the situation of people with unstable employment records.
Fifth, there is a question of social justice. The work-friendly system developed after 1999 means there is a closer connection between contributions paid and benefits received (actuarial link). This is clearly right. In other words, the state gave up its income redistribution role. As a rule early retirement possibilities have been abolished. Moreover, the new system does not address the issue of gender equality. Given the different retirement age and the above-mentioned connection of contribution periods and amount of benefit, women will be receiving lower benefits. At present proposals of retirement age equalisation are not approved of by the majority of the population.
Sixth, limitation of investment possibilities of Open Pension Funds is a very interesting issue. There have been numerous discussions — without reaching a consensus — over rules of investments for the Open Pension Funds. A ban on investing into the so-called ‘insecure investments’ seems understandable. But in the context of Poland’s membership in the EU and free movement of capital, maintenance of the limitation that only 5% of the resources of Open Pension Funds can be invested outside Poland is questionable. This gives rise to an objection from both the European Commission and some member states. Some also question the Funds’ right to seek capital outlays ensuring the highest possible return rate. In 2002 — for political reasons – the system of supervision of the Open Pension Funds was overhauled through establishment of the Commission on Supervision Over Insurance and Pension Funds.
A number of issues remain to be resolved. An incentive system for the third-pillar insurance is lacking. The Social Insurance Institution has failed dismally as far as the transfer of premiums to Open Pension Funds (Łuszczewski 2000: 5). During the first few months of operation of the new system the Social Insurance Institution turned out to be incapable of smooth processing of personal data. Even after few years since the new system was launched the premiums are often delayed and insufficient. Last but not least, the Polish disability pension insurance is fraught with corruption. A new computer system in the Social Insurance Institution was introduced in a climate of financial scandal. Some research suggests, that many medical declarations concerning work incapacity are issued by corrupt doctors (licensed by the Social Insurance Institution) in exchange for kickbacks.

4. The policy shopping at European Level as a Point of Reference for Future Reform

The accession to the European Union brought little direct changes in the Polish pension system. The only novelty was to include it into the Community co-ordination of the social security systems. After May 1, 2004 Poland is obliged to transfer pension benefits to other member states if a person who had worked in Poland moves to live abroad. The integration with the Community in this respect was a big challenge to the Polish administration as far as the costs and preparatory procedures are concerned.
Although the major thrust of the pension reform in Poland was carried out before the accession negotiation began, in recent years the European Union, as an important player of policy exchange at European level exerts growing influence over strategic choices for the future of the Polish pension system.
Given the pressing demographic challenges in the member states, the European Union has not remained idle in the global pension debate. The pension reform was made a subject of discussion and policy exchange at European level through the peer pressure mechanism of the Open Method of Co-ordination. In 2001 common objectives for the modernisation of pension systems were adopted. The objectives were grouped around three key priorities: adequacy, sustainability and modernisation. Adequacy is mainly about prevention of social exclusion in old age, maintenance of living standards for pensioners and solidarity between generations. Sustainability has to do with co-ordination of pensions with labour market policy, active ageing strategies and sound public finances. Modernisation is about making pension systems more responsive to social and economic change through more efficient institutional arrangements.
In 2002 member states provided the European Commission with reports on the national strategies for modernisation of pension systems. Finally in 2003 the European Commission and the European Council prepared jointly the analysis of developments in the member states. Additionally, the Social Protection Committee has conducted numerous studies dealing with specific subjects such as the adequacy and financial stability of pension systems.
The peer pressure mechanism is repeated cyclically. NSRs are perceived by the European Commission as ‘instruments for furthering the national policy debate’. In other words, they should form a basis for deliberations not only at European but also at national level (Social Protection Committee 2005: 2). By July 2005 the Member States (Poland included) were to submit the next round of national strategy reports (NSR). The discussion of a first draft of the Commission services document on adequate and sustainable pensions is planned for November 2005.
What is the influence of the peer pressure mechanism on the Polish pension system? Given that the intergovernmental character of the European initiatives does not pose an immediate obligation to adopt policies prescribed by the European Commission. Moreover, specific measures to meet common objectives are not determined at European level. There are, however, some implications for the Polish pension system. Firstly, the European Union provided Poland with the methodological basis for efficient monitoring of pension reforms and policies, through a set of indicators comparable with that of other Member States. This makes for a cohesive statistical system. It is not only about pensions in the strict sense — the method of calculating public debt or definition of social exclusion might be decisive in setting the course of the pension reform both at national and Community level. Additionally, the Commission defines the agenda of research in the field of social policy, steering the directions of debate in the Member States.
Secondly, certain policy prescriptions seem to be spilling over to the national agenda. Thanks to European activities in this field, gender equality and gender impact of pension systems started to be taken into account in Poland. Since the accession there have been efforts in Poland to describe any forms of unequal treatment between men and women that are entrenched in the pension system (retirement age, survivors’ benefits, special advantages for raising children, mortality tables used for the calculation of benefits).
Thirdly, Poland, being committed to develop NSR, made a significant leap forward as far as the programming of Polish employment policy is concerned. It is rational to expect that soon the Polish authorities will develop a multi-faceted strategy. For example the NSR commitments put the Polish authorities under obligation to discuss the likely evolution of incomes for the elderly, taking account of employment histories of future pensioners, of demographic developments and envisaged ongoing reforms in pension system (Social Protection Committee 2005: 6). The national policy-makers were able to acquire a better understanding of the strengths (better demographic situation) and weaknesses (high level of profession deactivation) of Poland in a European perspective.
Social policy is debated in the European Parliament, in the Council of Ministers or the European Commission. The Social Economic Committee or the Dublin Foundation operate autonomously at supranational level. It is hard to overestimate these forums as platforms of idea exchange. Even if problems of pensions or health care can only be dealt with at national level, policy exchange is an important convergence factor for national welfare states. These institutional aspects of social integration, though mundane and full of technicalities, deserve some attention.

8 Unemployment remains a major problem in Poland. In 2005 approximately 18% of the labour force was unemployed.
9 Austria, Belgium, France and Germany reformed their social security systems so that the insurance records of parents who raise children are supplemented with hypothetical contribution years for the time spent on childcare.
10 ‘Ongoing efforts at pension reform offer […] an example of path-dependent policy. There are huge sunk costs in whatever system obtains in any country. An overnight shift from pay-as-you-go to a fully funded system would impose a double financial burden on at least one generation. The upshot is that radical change is unlikely, but not that reform is impossible as long as it remains loyal to prevailing principles and starting conditions (Hemerijck 2002: 17).

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