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The Quest for Pension Reform: Poland's Security though Diversity

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  • Marek Gora
  • Michael Rutkowski

Abstract

All over the world, pension systems have financing difficulties that need to be addressed. There are three ways of dealing with pension systems problems, namely subsidisation, rationalisation and reforming. Opposite to the first two, the latter one means a deep change of system fundamentals. The new system is a way of income allocation over life cycle. The system is entirely based on individual accounts. Individuals have two accounts each. At the day of retirement amounts accumulated in each of the accounts are annualised. Pensions depend on two factors: (a) accumulated capital, and (b) age of retirement. Such old-age pension system provides its participants with high security thanks to diversification of risk between two markets, namely the labour market and the capital market, and full link between contributions and benefits. Minimum guarantee is financed by the state budget. The new system is less exposed to typical problems of that markets. Additionally, it is more resistant to political pressures. Additionally, the new system is expected to create the following externalities: change of savings structure in favour of long term savings, less incentive for early retirement, and less incentive for hiding income. The old Polish old-age system was terminated on 31 December 1998 - a new one called "Security through Diversity" was introduced on 1 January 1999. The new system covers people up to 50. The most important feature of the new system is its separation within social security. In particular, a separate contribution is paid for old-age. One part (5/8) of that contribution goes to a notional defined contribution 1st pillar individual account, the other part (3/8) goes to fully funded 2nd pillar individual account. Both elements of the system work along defined contribution regime. People between 30 and 50 have an option to pay entire contribution to 1st pillar individual account, people below 30 have their old age contributions automatically divided between the accounts.

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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 286.

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Length: pages
Date of creation: 01 Jan 2000
Date of revision:
Handle: RePEc:wdi:papers:2000-286

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Keywords: old-age pensions; individual accounts; defined contribution; income allocation;

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References

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  1. Palacios, Robert & Rocha, Roberto, 1998. "The Hungarian pension system in transition," Social Protection Discussion Papers 20048, The World Bank.
  2. Holzmann, Robert, 1998. "Financing the transition to multipillar," Social Protection Discussion Papers 20052, The World Bank.
  3. Whitehouse, Edward, 1999. "The tax treatment of funded pensions," MPRA Paper 14173, University Library of Munich, Germany.
  4. James, Estelle, 1998. "New Models for Old-Age Security: Experiments, Evidence, and Unanswered Questions," World Bank Research Observer, World Bank Group, World Bank Group, vol. 13(2), pages 271-301, August.
  5. Robert Holzmann, 1997. "Fiscal Alternatives of Moving from Unfunded to Funded Pensions," OECD Development Centre Working Papers 126, OECD Publishing.
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Cited by:
  1. Axel Börsch-Supan, 2003. "What are NDC Pension Systems? What Do They Bring to Reform Strategies?," MEA discussion paper series, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy 03042, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  2. Whitehouse, Edward, 1999. "The tax treatment of funded pensions," Social Protection Discussion Papers 20126, The World Bank.
  3. Robert Holzmann & Richard Hinz, 2005. "Old Age Income Support in the 21st century: An International Perspective on Pension Systems and Reform," World Bank Publications, The World Bank, number 7336, August.
  4. Marek Góra, 2003. "Reintroducing Intergenerational Equilibrium: Key Concepts behind the New Polish Pension System," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 2003-574, William Davidson Institute at the University of Michigan.
  5. Disney, Richard & Whitehouse, Edward, 1999. "Pension plans and retirement incentives," MPRA Paper 14755, University Library of Munich, Germany.
  6. Richard Disney & Robert Palacios & Edward Whitehouse, 1999. "Individual choice of pension arrangement as a pension reform strategy," IFS Working Papers, Institute for Fiscal Studies W99/18, Institute for Fiscal Studies.
  7. Grimmeisen, Simone, 2004. "Path dependence and path departure: Analysing the first decade of post-communist pension policy in Hungary, Poland and the Czech Republic," Working papers of the ZeS 01/2004, University of Bremen, Centre for Social Policy Research (ZeS).

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