The Polish pension system in comparative perspective

5. Economic integration and the Common Currency

There is one more aspect of the Polish membership in the European Union that needs to be raised in the context of pensions. In the contemporary world social issues seem to be more and more interwoven with the economic ones. For example, tax credits — a form of negative income tax, used in many developed countries to redistribute household incomes is a good example of an approach where the fiscal and social policies converge. This tight connection is particularly visible when the European Monetary Union is concerned. Once the monetary policies are integrated at European level, the financial basis of national welfare state cannot possibly remain unaffected11. Triggered by the common currency, ongoing liberalisation leads to tax competition which, under certain circumstances, may result in the ‘race to the bottom’. Current debate about delocalisation reflects the social and economic consequences of establishment of the Single Market in 1992. High-tax countries with overregulated labour markets seem to be most affected by this phenomenon.
According to estimates of the Polish National Bank Poland will join EMU in 2011. Poland is, however, bound by tight fiscal rules even before joining the euro zone. on several occasions, the European Commission urged Poland to trim its fiscal deficit. If Poland is to meet the Maastricht convergence criteria soon, its social security system must be put on a more sound financial basis. Given the fiscal constraints imposed by the European Union and the anticipated financial increases connected to demography, the Polish government should start reducing public debt before huge cohorts of the labour force enter into retirement in 20-30 years’ time, so that there is financial leeway for the public sector. This means less ambitious social programmes in the short term and a totally different philosophy of the welfare state in the longer term.
This philosophy resembles the rhetoric of Third Way politicians in Great Britain who advocate the merits of the ‘social investment state’, a welfare state which merges fiscal responsibility and ambitious social aims into a distinctive policy-mix, which is characterised by lower but better targeted social expenditure (Giddens 1994, Giddens 1998). The Keynesian welfare state with public deficit-financed social investments has been ruled out through the Stability and Growth Pact regulations. In the context of constraints imposed on budget policies the traditional welfare state model (e.g. Keynes-Beveridge model) belongs to history.

6. Conclusion

This article was aimed to give a general overview of the recent pension reform in Poland. Has the new system lived up to its expectations?
Polish reforms are far reaching, but their implementation is incremental, which means there is a long transition period before the new system will be fully introduced and the provisions of the old regime are phased out. The reformed pension system in Poland has got some clear advantages. It is fairer through linking of contribution and benefits. It is also more employment-friendly, which in the context of an ageing society cannot be underestimated. Private savings are encouraged, pension markets and private financial institutions in income maintenance provisions for pensioners are fostered. The system has been put on a much more stable financial footing through price/wage valorisation and more rigorous principles of benefits calculation. It should be noted, however, that financial risks persist.
The Polish government needs to consider further reforms such as raising the retirement age. The pension reforms should be pursued in parallel to the overhaul of family policy (to counter low birth rate) and labour market policy (to foster professional activation) and social integration initiatives (to prevent poverty in old age). Above all the Polish government should make it clear to younger cohorts of population that the new system entails a decline in prospective pension benefits, which necessitates supplementary pension insurance. The above-mentioned risks and challenges to the pension system show how fragile and vulnerable new institutions and systemic arrangements are. The biggest risks have to do with levels of benefits in future, profitability and security of Open Pension Funds investments and income security in old age for the lowest income group of the population.
Although the role of the World Bank in the context of the pension reform is often stressed, Poland does not fully fit the World Bank paradigm. It is rather an amalgamation of various policy prescriptions. The construction of the first pillar resembles much more the ILO standards. It is worth noting that the public scheme was not overhauled towards a significant mandatory private pillar.
One has to state clearly, however, that the experience gained by Poland both in the programming and implementation of the new pension system should help other EU member states in the debate on own reforms. Despite many problems, the system in Poland works and its functioning does not give rise to too many controversies. Poland can serve here as an example of long-term programming of changes. The introduction of the new system went fairly easily. Examples of France or Italy, where even announcing a reform breeds protests proves that Poland has covered a significant distance towards the modern financially stable welfare state. Examples of Poland or Sweden should be presented as an element in the promotional campaign introducing reforms.
A British magazine, the Economist, has recently published an interesting story connected with the seventieth anniversary of signing the Social Security Act by Franklin Delano Roosevelt (Economist 24-08-2005). In January 1937, on the first day of operation of the public pension system in America, a man named Ernest Ackerman had to pay 5 cents through contribution. The next day, when going on retirement, he received a lump sum of 17 cents. Despite the fact that the benefit was insignificant in real terms, Mr Ackerman could have boasted an amazing rate of return, something the modern pension systems could never match. In 1999, when the new pension scheme was established, popular expectations ran very high. What was generally overlooked is low benefits are direct reflection of low earnings and underdevelopment of economy, and that even the perfect system will not generate additional wealth. Time will tell whether the existing institutional arrangements and all the future modifications, especially the ones connected with the European peer pressure mechanism, will provide for a sound and efficient pension system.

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