Thinking About Pension Systems for the 21st Century: A Few Remarks Based on the Polish Example

45 Pages Posted: 9 Aug 2018

See all articles by Marek Góra

Marek Góra

Warsaw School of Economics (SGH); IZA Institute of Labor Economics

Date Written: July 24, 2018

Abstract

The end of 2018 will mark the 20th anniversary of the introduction of Poland’s current pension system. It has been subjected to constant modifications, in general dictated by either ideological or ad hoc goals, but it has resisted destruction, and in essence is working as it was designed. The need for its introduction, misleadingly called a reform, was dictated by a long-term shift in the age structure of the population. In essence, the earlier system was replaced by the current one. The essence of this switch is a shift from the quasi-tax financing suited to the population structure by age of the past, to quasi-savings financing suited to the structure in the 21st century. This text is not an overview of the 20-year history of the current system; it is a critical examination of the functioning of Poland’s pension system against the backdrop of the universal challenges that pension systems are facing in the 21st century. The text barely touches on many fundamental questions. A full discussion of them would require a longer discourse, for which there is no space here. The purpose of introducing the current system was to balance the interests of the working generation and the generation of retirees. The previous system worked only for the interests of retirees, while those of the working generation, expressed in the level of its net income, was treated as an afterthought. This kind of system could operate in the 20th century. But in the 21st, it turned out to be not so much immediately impossible, as socially harmful. A change of system was thus essential. The current system is now quite well suited to the current population structure. The biggest problem in its functioning is citizens’ negligible awareness of how it is actually structured and what that implies – both on the macro level and on the level of individual behaviors. Pension issues are counterintuitive. This results both from their combination of macro- and microeconomic issues and from the fact that their time horizon exceeds any other undertaking. For a pension system to work well, it has to be understood by its participants; meanwhile, pension education practically does not exist. What’s worse, the public debate concerning pensions tends to frighten people rather than helping them. Instead of knowledge, there are chaotic assumptions, often far removed from reality. They are adopted as axiomatic, or as a result of inertia in thinking, or unrealistic expectations. In the first case, the current system is perceived as if it were the previous one. Meanwhile, in reality they are fundamental opposites. In the second case, people expect that the system will miraculously multiply the funds available for pensions. But in reality each system can only divide up what has been created. Discussions partly concern side issues, partly consist of misunderstandings and partly are derivations of general views. Much harm was done by the discussion on changing the proportions of the division of contributions in the universal system (the so-called OFE discussion). , Debate on pension questions requires that the issues be laid out in an orderly fashion; we need a critical view of basic concepts and how they are understood. Without that there is no chance to solve the problems of pensions systems, or even to understand what they’re about. Pension systems face similar issues in most OECD countries. Poland stands out from the majority of other countries in its relatively early steps to adjust the system to the demographic situation. Poland, Sweden and Latvia (and partly Italy) are countries that have already made fundamental adjustments. The systems introduced in these countries are in essence quite simple, so they can be transparent and comprehensible. This is hugely significant in times when the demographic dividend, which earlier provided significant additional resources to finance payouts, has turned negative. Other countries for now are using less decisive actions. In this text I will not deal with the past; instead, I will attempt to examine several fundamental questions which are ignored or marginalized in the public debate, and whose interpretation is important in relation to actions taken and the debate itself, both among experts and among the broader public. Meanwhile, this is not a text focused on the Polish pension system, which here serves only as an example for analysis of what is important, and why, in every pension system (including the Polish one). To a lesser degree, this text concerns the management of a system, and all technicalities and regulations related to it.

Keywords: Pension Systems, Demographic Transition, NDC/FDC, Tax-Financing, Savings-Financing, Political Economy, Polish Pension System

JEL Classification: H55, J18

Suggested Citation

Góra, Marek, Thinking About Pension Systems for the 21st Century: A Few Remarks Based on the Polish Example (July 24, 2018). CASE Research Paper No. 154/2018, Available at SSRN: https://ssrn.com/abstract=3219739 or http://dx.doi.org/10.2139/ssrn.3219739

Marek Góra (Contact Author)

Warsaw School of Economics (SGH) ( email )

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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