Polish Old Age Pension Reform

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1 Polish Old Age Pension Reform Marek Góra Team Leader 1

2 Demography Poland s demographic structure in women 2000 men 2

3 Demography Poland s demographic structure in women 2025 men 3

4 Demography Poland s demographic structure in women 2050 men 4

5 Old system Early retirement costs in 1996 r. 11% mln zloty 50,000 40,000 30,000 20,000 10,000 34% - De-facto Contributions received Old-age pensions paid Hypothetical 5

6 Old system Early retirement cost in 1996 r. Contribution (45 per cent) 12 percentage points Percentage by which the contribution could be reduced if the early retirement schemes were abolished 6

7 Old system Characteristics Expenditure - c.a. 15% of GDP (including farmers and armed forces), based fully on PAYG principles Budget subsidies to Social Insurance Fund - c.a. 2% of GDP Early retirement High contribution rate lower competitive advantage of Polish enterprises growing informal sector Ageing population increasing life expectancies lower fertility 7

8 Old System - Threats Consequences of Population Ageing Maintaining of the old system would cause: Increase of contributions or Increase of taxes or Reduction of pensions 8

9 Social sector in Poland Old-age pension system Non-old-age pension and benefit system Other elements of the system 9

10 New system Contributions 2,45% 1,62% 19,52% 12,22% 13,00% 7,30% Disability Sickness Work injury PAYG Funded Contribution is paid by employee and employer: old-age: 50% employee, 50% employer disability: 50% employee, 50% employer sickness: 100% employee work injury: 100% employer 10

11 Three dimensions of pension systems differences Defined benefit vs. defined contribution Investment of contributions vs. savings Public management of schemes vs. private management 11

12 Accumulation and annuity phase DC DB insurance retirement age accumulation insurance 12

13 New System Three Pillars (old-age pensions) PAYG/DC obligatory, individual account, administered by the public institution, Funded/DC obligatory, individual account, administered by private institutions, Funded voluntary, capital, administered by private institutions, individual accounts First Pillar Second Pillar Third Pillar Mandatory Old-age System 13

14 New System Financing and Functioning SYSTEM FINANCING PAYG First Pillar funded Second Pillar Third Pillar universal additional, voluntary SYSTEM FUNCTIONING 14

15 Old-age pension system reform PAYG FUNDED DB Old system DC 1 st pillar ind. account 2 nd pillar ind. account New system 15

16 Old old-age system closing down For people born after 31 December 1948 the old old-age was terminated on 31 December 1998 There is no option to stay in the old old-age system Initial capital is money equivalent of pension rights collected under the old old-age system at the day of its termination 16

17 Starting the new old-age system New old-age system started on 1 January 1999 New old-age system is a method of allocation of income over life cycle New old-age system covers people born after 31 December 1948 There is no option to join the new old-age system for people born before 1 January

18 New System Age groups under over 50 Two accounts One or two accounts No accounts mandatory entry into the new system (1 st and 2 nd Pillars) mandatory entry into the new system (1 st pillar only or 1 st and 2 nd pillar) stay in the old system New old-age system Old system 18

19 Key features of the new old-age pension system (1) Social goal -- income allocation over life cycle Functional separation of old-age pensions within the system Defined contribution (individual accounts) Risk diversification (labour market and capital market) Clear distinction (accumulation and benefit period) Annuitisation of accounts Minimum pension (state budget financed) 19

20 Key features of the new old-age pension system (2) No redistribution No privileges Integrity of old-age system Building reserves State supervision and guaranties Flexibility 20

21 Buffer Fund Contributions to the PAYG pillar Old-age pensions from PAYG pillar Old-age pensions from PAYG pillar Contributions to the PAYG pillar 21

22 Previous old-age formula Defined benefit P=0.24W+W*I*0.013*L+W*I*0.007*S W - national average wage for previous quarter I - individual wage index L - total length of service S - additional years accepted for insurance benefits 22

23 Previous old-age formula caused incentives Hidding income Retiring as early as possible Seeking privileges 23

24 New system benefits Defined contribution in the entire old-age system (non-old-age parts of social security work along defined benefit) P=K G K accumulated capital G life expectancy at retirement 24

25 Economic effects The reform will contribute to economic growth through: Increase of longterm savings Decrease in interest rates Better investment opportunities Decrease in contribution Decrease in labour costs Increase of economy s competitiveness 25

26 Pension funds assets % 30% 25% % GDP 20% 15% 10% 5% 0%

27 Perfect timing for the reform Good demography Economic growth Privatisation revenues still available Public support Political window of opportunity 27

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