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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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  • Chlon-Dominczak, Agnieszka
  • Strzelecki, Paweł

Abstract

Pension systems’ reforms are often related to a shift towards (fully or partially) defined contribution systems, in which the pension distribution reflects to a larger extent the wage distribution. Additionally, relatively shorter working lives of those that have lower earnings, increase the risk of receiving lower benefits. The aim of the paper is to present the changing role of minimum pension as a tool of redistribution in Poland after the pension reform. The new mandatory pension system covers workers born after 1948 and is based on two components – notional and funded defined contribution (NDC and FDC). It replaced the old defined-benefit PAYG system, which had a significant redistribution through the pension formula. The formula itself served as a tool of low income protection, that was additionally strengthened by the minimum pension guarantee. The new system aims at actuarial fairness, which means that the only mechanism of redistribution is the minimum pension, financed from general taxes. As a result of this change, grater income inequalities of pensioners following those of people in working age are expected. This means a change of the role of the minimum pension from one of the tools supporting redistributive policy to the main tool of social policy preventing poverty among elderly persons. The minimum pension is expected to fall compared to average wage. The decision on its level and evolution becomes one of the most important policy questions. It will have crucial importance in preventing poverty in the old-age. Simulations are used to present the impact of changes in the pension distribution on the number of pensioners covered by minimum pension.

Suggested Citation

  • Chlon-Dominczak, Agnieszka & Strzelecki, Paweł, 2010. "The minimum pension as an instrument of poverty protection in the defined contribution pension system – an example of Poland," MPRA Paper 25262, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:25262
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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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    1. 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.
    2. 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.
    3. Agnieszka Chlon-Dominczak, 2013. "Female Transition to Retirement," IBS Working Papers 2/2013, Instytut Badan Strukturalnych.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    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. 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.
    11. 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.
    12. 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.
    13. 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.

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    More about this item

    Keywords

    pension system; old-age poverty; minimum pension; indexation rules; define contributions; DC sytem; pension distribution;
    All these keywords.

    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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