Poland, a Central European country, has been a Member State of the European Union since May 1, 2004.
Europe is the cradle of social policy. The first Poor Law was introduced in England in 1601, and at the end of the nineteenth century social policy became an instrument with which the state intervened in social matters, mainly owing to the actions of German Chancellor Otto van Bismarck, who introduced obligatory insurance against old age and disability. Since then, social policy has gradually become an important element of the functioning of the state. It is commonly accepted that Europe has a certain social policy model. Among European countries, the types of risks covered by social security schemes are very similar. Such schemes cover old age, disability, death of the main breadwinner, sickness, maternity, occupational diseases and accidents at work, and unemployment. These schemes also provide assistance for families. A growing number of countries have created mechanisms to ensure both in-kind and financial long-term care benefits.
However, in practice, social insurance, health care, and social assistance systems vary among European countries.
In most European countries, administration of the social security system is the purview of public institutions whose advisers, often acting as members of supervisory boards, include representatives of the main participants of the system: employees, employers, and in some cases pensioners.
The social insurance system in Poland and in other European countries cannot be examined without reference to current economic conditions. In particular, our countries function within the new phase of economic development, namely globalization. Many countries experience strong competitive pressure from globalization. Since capital flows to places where production costs are lowest, many governments have been forced to loosen labor laws in order to allow for easier hiring and firing of employees, reduction of labor costs, and more flexible distribution of the workforce.
In terms of social security systems, globalization means that it is necessary to reduce the subject matter scope of beneficiaries as well as the amount of benefits in order to create business-friendly conditions by reducing rates of social insurance contributions.
Another challenge for European pension systems is population aging. From 1960 to 2000, average life expectancy in the European Union grew by four years. It is expected that between 2000 and 2060, average life expectancy will increase by a further 8.5 years for men and 6.9 years for women. At the same time, the reproduction rate has dropped far below the replacement rate of 2.1 births per woman. The European Commission predicts that the combined effect of the longer life expectancy and the lower birth rate will result in a lower ratio of the economically active to the economically inactive, from 2.7 to 1 in 2009 to approximately 1.4 to 1 in 2060. This means that in the future, fewer economically active people will have to support more economically inactive people.1
Such demographic changes are also taking place in Poland. At present, Poland’s population amounts to 38.2 million. By 2035, Poland’s population is expected to decrease by approximately 2 million. This change will reflect two simultaneous processes: a decrease in the working-age population accompanied by a significant increase in the post-working-age population. As a consequence, the ratio of the post-working-age population to the working-age population (the demographic dependency ratio) will grow. Currently, for every 100 people of working age there are 26 people of post-working age, by 2020 the latter figure will be 37, and in 2035, 46.
The change in the post-working-age population stems from the rising average life expectancy which is a result of significant improvements to the population’s health and living standards. In 1990, a 60-year-old woman was expected to live on average for 19.96 years more and a 60-year-old man for 15.33 years more. In 2009, a 60-year-old woman was expected to live on average for 23.2 years more and a 60-year-old man for 17.9 years more.
Naturally, this phenomenon has a positive impact on society; however, in the context of social insurance, it leads to a longer period of receiving pension benefits and, as a consequence, a greater burden for the finances of the social insurance system.
The aging population is a challenge for every pension system. The related problems of smaller numbers of economically active people, decreasing fertility, increasing expenditure for benefits, the need to care for vulnerable pensioners, health care costs, and the progressive marginalization of the older population constitute a serious threat not only to the future of the social insurance system but to the entire economy.
Reforming the Pension System
Before 1999, Poland’s pension system was incongruent with market economy principles, as it did not sufficiently account for the individual work activity and prudence of the insured in relation to the level of benefits. Under that system, there was no relation between the level of social insurance contributions and the amount of future pension benefits.
Excessive burdening of public finance, along with implementation of pension privileges granted to certain professional groups in the 1970s and 1980s, resulted in the pension system gradually becoming inefficient. If its form had been maintained, it would have led to a breakdown of state finance or a dramatic decrease in the amount of benefits.
Demographic factors were among the main reasons for the pension reform of January 1, 1999. The reform included a series of changes:
1) Cancellation of the early retirement privilege (i.e., before age 60 for women and age 65 for men)
2) Change of the defined benefit system into a defined contribution system
3) Creation of individual accounts for the insured
4) A system based on three pillars (described below)
The work on the reform was based on the following objectives:2
1) The reform has to lead to creation of a system that will function effectively for many generations.
2) The new system has to ensure maximum social security for all citizens;
3) The old system has to be modified in a way that will allow for meeting the obligations it had undertaken in the past.
4) The costs of the reform may not exceed the capacity of the economy, and the costs of transition should be financed with a long-term perspective.
5) The reform has to take into consideration examples of both traditional pension systems as well as modern concepts that account for the changing conditions that affect the functioning of the social insurance system.
The proposed system was supposed to enable achievement of the most important objective, namely to ensure the highest possible level of benefits for future generations, protected against inflation and proportional to previous earnings and, hence, to current contributions.At the same time, it was designed to guarantee
insurance to the present beneficiaries.
The new Polish social insurance system is composed of three related segments, or pillars. Each has different characteristics:
> First pillar: obligatory, common, based on the pay-as-you-go (PAYG) principle, administered by the state (Social Insurance Institution)
> Second pillar: obligatory, common capital, managed by private entities (open pension funds)
> Third pillar: additional, voluntary capital, managed by private entities (individual retirement accounts and employee pension schemes)
The PAYG principle is implemented under the first pillar, the common insurance system. The resources gathered under this pillar are supposed to act as a guarantee in the case of specific insurance risks, such as the risk of retirement. This is particularly important in the situation of a growing number of beneficiaries and a simultaneous decrease in the number of people contributing to social insurance.
The previous system, in which current pensions were paid with currently received contributions, was replaced by a system in which a part of pension was to be paid by the public institution, the Polish Social Insurance Institution (ZUS), and the second part was to come from contributions transferred to private open pension funds. In 1999, despite the already insufficient amount of resources in ZUS, it was decided that more than one-third of the pension contribution would be transferred from ZUS to open pension funds. Following this decision, 12.2 percent of the pension contribution (amounting to 19.52 percent of the contribution assessment basis) remained in ZUS, while 7.3 percent was transferred to the open pension fund chosen by the insured (in the case of people who were not members of any open pension fund, the entire contribution remained in the pension account in ZUS). At the moment, approximately 14 million people are members of open pension funds.
Transferring part of the contribution to open pension funds resulted in decreased proceeds of the Social Insurance Fund (FUS), which is responsible for paying current benefits. In previous years proceeds from contributions did not cover expenditures for benefits, so it was necessary to increase the financing of FUS from other sources.
As a consequence, it was necessary to secure resources for payment of the current benefits in the state budget. The subsidy from the state budget, which is planned every year, at present amounts to nearly 30 percent of the expenditure necessary for pensions.
To cover the increasing costs of the social insurance system, the state was forced to increase public debt, mainly through sales of treasury bonds. These securities were purchased by open pension funds, which in this manner conducted their conservative investment policy, investing less than 30 percent of their assets in bonds.
The experience of Poland and other countries that have pension systems with the funded pillar led to the verification of optimistic proportions adopted by Poland in 1999, which enabled open pension funds to manage as much as one-third of the pension contribution. Such a high proportion not only heightened the risk of possible cyclical loss of a considerable part of the resources in an economic slump (which negatively affects the amount of pensions and increases the burden on the state budget on account of the minimum guaranteed benefit) but also constituted a burden for the future generations that would have to pay off the large treasury debt incurred to co-finance today’s pensions.
Other countries were less optimistic in applying the proportion for the capital market. For example, in relatively wealthy Sweden, only 2.5 percent of the pension contributions were transferred to pension funds.
In addition to the three-pillar structure, the 1999 pension system reform introduced other solutions.
The government’s activity was focused on gradual liquidation of the early retirement privilege, since the previous system listed many exceptions from the general retirement age of 60 years for women and 65 for men. The new solutions did not allow for early retirement for any professional group; however, a bridging pension system was designed for people who work in particular conditions or whose profession is of a specific nature, and compensation benefits were created for teachers.
Another step taken by the government consisted of plans to increase the number of economically active persons, which seems to be the best way to mitigate the consequences of the aging population and to stabilize the finances of the social insurance system.
Other European countries, in order to solve this problem, gradually raised the retirement age. However, in Poland, where the system is still in the transformation phase, efforts should focus first on introducing incentives for those who want to work longer, on eliminating legal and financial factors that contribute to earlier withdrawal from the labor market, on financial incentives for employers to employ older adults, and on re-employment of working-age people, at the same time leveling the actual and statutory retirement age.
The 1999 reform was not enough to solve all the problems of the pension system. In light of the great challenge caused by the unfavorable demographic situation, further reforms were introduced.
To promote re-employment of older adults, a program was created to improve the level of employment of people older than 50. The program’s task was to create incentives to encourage seniors to take up jobs and discourage them from early retirement, as well as to promote employment of older people among businesses.
Another element that may indirectly boost professional activity among adults is family policy, composed of three elements, including the act on care for children under age three, which was adopted this year. Its objectives include ensuring institutional care for young children, which should increase employment rates of parents and their relatives, who previously would have resigned from work in order to take care of the children.
The Polish government also wants to develop caretaking services for seniors who are in poor health, which should enable people who might have resigned from work to care for an older relative to maintain employment.
The problem of the lack of resources in the Social Insurance Fund, caused by the transfer of part of the pension contribution to open pension funds, was becoming more and more pressing. As a consequence, public debt was growing rapidly, as were the borrowing needs of the state budget. Therefore, in 2010 work was started to streamline the system. The new reform, which comes into force on
May 1, 2011 (some solutions will become binding on January 1, 2012), is aimed at limiting the borrowing needs of the state budget without affecting the level of pensions from the obligatory part of the pension system.
The pace of public debt growth will be slowed by transferring part of the pension contribution to a special new subaccount managed by ZUS. The integrity of the second pillar, which will still receive 7.3 percent of the pension contribution, will be maintained. The resources gathered under the second pillar will be divided in the case of a divorce or inheritance upon the insured’s death, under principles analogous to the present ones. In 2011 and 2012, 2.3 percent of this part of the contribution (the target 3.5 percent will be introduced in 2017) will be transferred to open pension funds, while the rest will be kept on the individual pension subaccount in ZUS. The resources gathered in the subaccount will be indexed on the basis of average nominal growth of the gross domestic product (GDP) from the previous five years (with the proviso that the indexation rate may not be of negative value). This type of indexation will ensure that in the long term, the return on the resources gathered on the subaccount in ZUS will be similar to the return on the bond part of open pension funds, as the long-term return on bonds and the nominal pace of GDP growth are expected to be comparable.
The second, equally important, objective of the reform is to stimulate the growth of pension savings levels and, thus, the total replacement rates. This task will be achieved by modifications introduced in two areas of the pension system.
First, more flexible investment limits for open pension funds will be introduced. The part of open funds’ assets that can be invested in equity instruments (mainly shares of companies listed on the exchange regulated market) will gradually increase in order to raise the share of this type of securities in the entire second pillar. The investment limit for equity instruments is expected to grow to 62 percent in 2020 from 40 percent in 2010 (before the reform). This will allow for more efficient functioning of open pension funds in terms of the growth of return rates on investments of resources gathered under the funded part of the pension system.
The third, voluntary pillar of the pension system was also modified. In order to increase the use of additional forms of pension saving, it is now possible to deduct payments for the newly created Individual Pension Security Account (IKZE) from the income tax basis. IKZE is a separate record or account administered by investment funds, entities conducting brokerage activity, insurance companies (life insurance with the insurance capital fund), banks, or common pension companies (which previously could manage only an open pension fund). To be deducted from the income tax basis, payments have to be at the level of 4 percent of the annual social insurance contribution assessment basis.
Influence of the European Union
Certain international regulations bind Poland and other countries. Such regulations include mainly bilateral agreements on social security, including the agreement on social security of April 2, 2008, between the Republic of Poland and the United States of America, as well as EU regulations binding Poland since the date of its accession (May 1, 2004.) Poland’s accession to the EU significantly influenced the area of social security, since Poland applies the EU provisions on coordination of social security systems, based on four main coordination principles: equal treatment; application of one law, aggregation of periods; and export of benefits. Polish migrating employees are guaranteed broader insurance coverage in a greater number of countries. This broader scope includes such benefits as pensions, disability pensions, benefits for an accident at work or occupational disease, sickness and maternity benefits, family, unemployment, and health benefits.
The EU regulations as well as regulations included in bilateral agreements on social security are legal grounds that ensure that change of the place of employment or residence will not negatively affect a citizen in terms of social security. Moreover, they provide protection for acquiring and exercising the right to social security benefits, they have a positive influence on strengthening trust of citizens in the state, and they contribute to more active employment seeking abroad.
1 Dynamic Social Security for Europe: Choice and Responsibility (Geneva: International Social Security Association, 2010).
2 “Bezpiecze´nstwo dzięki ró˙znorodno´sci. Reforma systemu emerytalno-rentowego w Polsce” (Warsaw: Office of the Government’s Representative for Social Security Reform, June 1997, p. VII).
Jolanta Fedak, member of the Polish Peasants Party (PSL), was appointed Minister of Labour and Social Policy in October 2007.