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The minimum pension as an instrument of poverty protection in the defined contribution pension system – an example of Poland

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  • CHŁOŃ-DOMIŃCZAK, AGNIESZKA
  • STRZELECKI, PAWEŁ

Abstract

Pension systems' reforms are often related to a shift towards (fully or partially) defined contribution (DC) systems, in which the pension distribution reflects to a larger extent the wage distribution. In addition, relatively shorter working lives of those who have lower earnings increase the risk of receiving lower benefits. The aim of the paper is to present the changing role of a minimum pension as a tool of redistribution in the country that replaced a defined benefit (DB) pension system with a DC pension system. The old system in Poland had a significant income redistribution in the pension formula and the minimum pension was only a tool supporting this redistribution. After the introduction of the new mandatory pension system the main mechanism of redistribution (and a tool of social policy preventing poverty) is the minimum pension, financed from general taxes. According to the current rule of indexation, the minimum pension is expected to fall relative to the average wage in the economy. According to our simulations, the lack of changes of the current indexation method means that the minimum pension will fall below the International Labour Organisation (ILO) standard of the poverty protection of elderly by mid 2020s and in practice the last instrument of the poverty protection of elderly is going to disappear. However, the sole decision to change the indexation mechanism to the one based on full wage can create a significant pressure on public finance and distort incentives for prolonging work as 45% of women would be probably covered by the minimum pension guarantee (MPG). Results of simulations show that a raise and equalization of the retirement age for men and women combined with keeping a constant ratio of the minimum pension to the average (and also minimum) wage in the economy can be considered as a balanced solution that assures no further reduction of poverty protection and effective maintaining of this redistribution instrument.

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  • Chłoń-Domińczak, Agnieszka & Strzelecki, Paweł, 2013. "The minimum pension as an instrument of poverty protection in the defined contribution pension system – an example of Poland," Journal of Pension Economics and Finance, Cambridge University Press, vol. 12(3), pages 326-350, July.
    • Handle: RePEc:cup:jpenef:v:12:y:2013:i:03:p:326-350_00
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    References listed on IDEAS

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    1. Chlon, Agnieszka & Gora, Marek & Rutkowski, Michal, 1999. "Shaping pension reform in Poland : security through diversity," Social Protection Discussion Papers and Notes 20852, The World Bank.
    2. Robert Holzmann & Edward Palmer, 2006. "Pension Reform : Issues and Prospects for Non-Financial Defined Contribution Schemes," World Bank Publications - Books, The World Bank Group, number 6983, December.
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    Cited by:

    1. Olga Rajevska, 2015. "Sustainability of Pension Systems in the Baltic States," Entrepreneurial Business and Economics Review, Centre for Strategic and International Entrepreneurship at the Cracow University of Economics., vol. 3(4), pages 139-153.
    2. Marta Lachowska & Michał Myck, 2018. "The Effect of Public Pension Wealth on Saving and Expenditure," American Economic Journal: Economic Policy, American Economic Association, vol. 10(3), pages 284-308, August.
    3. Angelo Marano & Carlo Mazzaferro & Marcello Morciano, 2012. "The strengths and failures of incentive mechanisms in notional defined contribution pension systems," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 71(1), pages 33-70, October.
    4. Alonso-García, J. & Devolder, P., 2016. "Optimal mix between pay-as-you-go and funding for DC pension schemes in an overlapping generations model," Insurance: Mathematics and Economics, Elsevier, vol. 70(C), pages 224-236.
    5. Goedemé, T., 2012. "GINI DP 27: Recent Trends in Minimum Income Protection for Europe's Elderly," GINI Discussion Papers 27, AIAS, Amsterdam Institute for Advanced Labour Studies.
    6. Olexandr Yemelyanov & Anastasiya Symak & Tetyana Petrushka & Roman Lesyk & Lilia Lesyk, 2018. "Assessment of the Technological Changes Impact on the Sustainability of State Security System of Ukraine," Sustainability, MDPI, vol. 10(4), pages 1-24, April.
    7. Carlos Vidal-Meliá & Manuel Ventura-Marco & Juan Manuel Pérez-Salamero González, 2018. "Social Insurance Accounting for a Notional Defined Contribution Scheme Combining Retirement and Long-Term Care Benefits," Sustainability, MDPI, vol. 10(8), pages 1-36, August.
    8. Sylwia Pieńkowska-Kamieniecka & Damian Walczak & Anna Bera, 2019. "Income and Social Determinants of Old-Age Savings: Evidence from Poland," Academic Journal of Interdisciplinary Studies, Richtmann Publishing Ltd, vol. 8, November.
    9. Piotr Lewandowski & Jakub Sawulski & Kamil Stronski, 2016. "Labour market segmentation and the financial situation of the pension system in Poland," IBS Working Papers 10/2016, Instytut Badan Strukturalnych.
    10. Elena Jarocinska & Anna Ruzik-Sierdzinska & Theo Nijman & Andres Vork & Niku Määttänen & Robert Gál, 2014. "The impact of living and working longer on pension income in five European countries: Estonia, Finland, Hungary, the Netherlands and Poland," CASE Network Studies and Analyses 0476, CASE-Center for Social and Economic Research.
    11. Carlos Vidal-Meliá & Manuel Ventura-Marco & Juan Manuel Pérez-Salamero González, 2018. "Actuarial accounting for a notional defined contribution scheme combining retirement and longterm care benefits," Documentos de Trabajo del ICAE 2018-16, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    12. Jia, Hongbo, 2017. "An evaluation of pension differentials between Chinese private and public sectors from perspective of protection and incentives over the lifecycle," China Economic Review, Elsevier, vol. 44(C), pages 16-29.
    13. Agnieszka Chlon-Dominczak, 2013. "Female Transition to Retirement," IBS Working Papers 2/2013, Instytut Badan Strukturalnych.

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    More about this item

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty

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