Poland’s pension system: Where are we, and what’s next?

Poles will soon mark the 20th anniversary of the reform that launched the current pension system. It’s worth looking back to sum up this period, to identify where we are and sketch out what has to be done in the coming years. That was the objective of Marek Góra, a professor at the Warsaw School of Economics and a co-creator of the system introduced in 1999, in his presentation at the 154th mBank-CASE seminar.

“The current retirement system is perceived through the lens of assumptions that largely do not match reality,” said when opening his talk. “We are in a blind alley – not only in Poland. We aren’t discussing things that are relevant to reality and to our times. The discussions that are happening are partly about tangential issues; they’re partly a misunderstanding; and partly they’re a result of people’s general views. The debate about retirement requires that we prioritize the issues. We need a critical examination of fundamental concepts and how we understand them.”

The need to change the pension system 20 years ago was driven by the consequences of long-term change in the age structure of the population. The purpose of the pension reform was to balance the interests of the working generation and the generation of retirees; the previous system only protected the interests of the latter. The essence of the reform was a transition from a quasi-tax to a quasi-savings model for financing pensions. The pension system introduced in 1999 was subjected to constant modifications, generally resulting from ideological or short-term goals. Even so, the system held up, and essentially operates the way it was designed.

Professor Góra devoted a great deal of time to examining the purpose that pension systems should fulfill; these include the division of GDP, fairness and intergenerational balance. In relation to the division of GDP, Góra said, “demography is king: what’s important is the proportion of the generation that’s working (producing GDP) to that of the retired generation (not participating in the creation of GDP, but participating in its consumption). Traditional 20th-century pension systems worked on the assumption that this proportion is relatively stable, while at the end of that century it saw a sharp and rather permanent change (a demographic shift). This derailed traditional pension systems, which lacked automatic adjustment mechanisms.”

In terms of the second goal, maintaining inter-generational balance, the essence is to treat the welfare of each generation as equally important. The distribution of GDP has to be more or less constant, regardless of the size of the generation. “This means each generation is compensated with its entire share in GDP – part today and part tomorrow. The total should be 100%, though some of it is in today’s GDP and some is in tomorrow’s.”

Professor Góra warned against using the pension system as a tool of economic policy, or for redistribution. First of all, this makes the pension system into a tax system, which increases distortion, with all its negative consequences. Secondly, the pension system isn’t an effective channel for financing redistribution; the tax system is better. The savings that the pension system is based on are neutral. “But taxes and political discretion create the impression that the poorer part of society is being protected.”

Professor Góra said the most dangerous modification of the system could be the removal of the 30-times limit on contributions. He stressed that there is no way to avoid an increase of the retirement age, and it is not sufficient to return to the level of 67 years. We cannot expect an improvement in the age structure of the population over a horizon of less than 50 years. The level of the replacement rate is generally determined by factors that are very resistant to politicians’ interventions.

“The greatest enemy of the system,” Professor Góra said, “is society’s poor understanding of the system’s structure. Instead of knowledge, there are chaotic assumptions that are often far from reality. Thus it is worth recalling how the system is constructed, what it’s based on, what must absolutely be defended and what is a secondary issue. This system is essentially quite simple. This means it can be made transparent and comprehensible – which is so important in times when the demographic dividend, which long ago provided significant additional funds to finance spending, has become negative.”