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What is the cost of funded pension scheme (OFE) in Poland?

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  • Michał Kempa

    ()
    (Ministry of Finance in Poland)

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    Abstract

    Funded defined contribution (FDC) scheme (Open Pension Funds) was created in Poland in 1999. 37.4% of the pension contribution is redirected to FDC, while the rest remains in the public notional defined contribution (NDC) system. The FDC share of the contribution is relatively high compared to other countries with similar systems, especially given the currently high structural deficit of the NDC system. In 2010 roughly 1.6% of GDP will be transferred to FDC bringing the total value of transfers (including the cost of financing) to 16.5% of GDP. This cost was fully covered by the state budget. The magnitude of transfers begs the question on its limit and time framework. The transition period, during which the accumulation of the assets in FDC takes place, is still far from over. Only those born after 1968 were obliged to join FDC, which implies that the disbursements from the new system will remain insignificant until 2030s-2040s. To estimate the impact of the FDC on the public fund balance one needs to take into account both the loss of the pension contribution and lower future pension paid from the public NDC. In this article this was accomplished by comparing the simulated balance of the public pension fund in two scenarios: one based on current legislation and an alternative one, where the whole contribution remains in the public NDC system. The difference between the pension fund balance in those two scenarios constitutes the cost of introduction of the FDC. The results show that the FDC will incur cost (albeit very small) even at the end of analysis horizon (year 2060). Including the cost of finance, by 2060 the accumulated cost of transfers to FDC will have reached 94% of GDP.

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    Bibliographic Info

    Paper provided by Ministry of Finance in Poland in its series Working Papers with number 7.

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    Length: 29 pages
    Date of creation: 03 Nov 2010
    Date of revision:
    Handle: RePEc:fpo:wpaper:7

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    Web page: http://www.mf.gov.pl
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    Keywords: Pension economics; pension finance; public finance;

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