Cause and Effect in European Politics and Law

The experience of Poland: the pension reform must not be postponed

Ralitsa Kovacheva, April 9, 2010

Within the framework of the discussion which euinside has initiated together with the Independent Pension Reform Council for a change in the pension model of Bulgaria, we will present to you the experience of some other European states. We start with Poland because of the similar past and the joint fear of aging population. The big difference is, however, that Poland, although it admits mistakes, in general it assesses its pension reform as positive. Bulgaria initiated the reform almost at the same time as Poland did, but later diverted from the right way. The most important lesson from the Polish experience is that the pension reform should not be postponed. Read the entire interview euinside made with Ms Anna Janiszewska-Nietubyć, charge d'affaires ad interim at the Polish embassy in Sofia:

euinside: When has the pension reform in Poland started and from what basis?

Anna Janiszewska-Nietubyć: The pension reform has started in Poland in 1999. It changed the way of calculating pensions, paid by then by an expenses-income system. The previous formula of defined pension payments has been replaced by the principle of a conditional assignment which created a stronger bond between the contributions and the pensions.

euinside: What model has been chosen and what kind of reforms have been performed?

Anna Janiszewska-Nietubyć: Three pillars have been created - one voluntary and two compulsory. The second pillar is the main feature of the reform. It is voluntary and consists of pension funds of an open type. Although they are part of the state pension system, the funds are being managed by private companies. The funds invest up to 50% of the money of the taxpayers in various financial instruments like bonds, shares, etc.

euinside: How is the system being financed and what is the contribution people pay in the second pillar (the private funds)?

Anna Janiszewska-Nietubyć: The main resource of funding for the pension system is the insurance contributions. The current pension contribution is 19.52% of which 7.3% is being paid to the pension funds. The system is partially subsidized by the state but the aim is in the future to be financed by the contributions of the taxpayers.

euinside: What is the situation right now - how much is a pension, what is the proportion of pensioners and workers, what is the pension age, demographic trends?

Anna Janiszewska-Nietubyć: The age for women is 60 years and for men - 65 years. The minimum pension is 675 zloty (173 euro), and the average is 1,500 zloty (385 euro). The minimum wage in Poland is 1,317 zloty (338 euro) and the average 3,288 zloty (845 euro). In January this year 5,003 mn pensions have been paid. In the third quarter of 2009 the number of employed was 15,885 mn people and the unemployed were 1,471 mn people. According to forecasts, in the next 25 years the population will be decreasing and the number of people in an age for pension will increase. The expectations are by 2030 this number to pass 9 mn people.

euinside: Did the crisis affect the high profitability of the pension funds in the last years?

Anna Janiszewska-Nietubyć: The crisis indeed affected the pension funds but the situation in Poland was far better than in other European countries. In 2008 the Polish pension funds lost around 14% of the invested money, but next year the situation stabilized and they reported profit of 13.8%. Compared to states like Estonia, Hungary and Lithuania, whose funds accounted significant losses in 2008, this is a very good result for Poland. Besides, the investment funds rely on long-term investments and after the crisis the savings will increase for certain.

euinside: How do you estimate the reform and what changes will be needed in the future?

Anna Janiszewska-Nietubyć: The pension reform is one of the first that took place after 1989 in the country. The previous system was a typical financial pyramid, doomed to bankruptcy. Because of this fact only, we could say that the reform must be assessed positively. Besides, it prevented a lot of people from becoming pensioners before reaching the pension age which was a relief for the budget. Of course not all goals of the reform have been achieved. During the reform there were mistakes, but the overall analysis shows that we have nothing to be ashamed of.

The reform will continue in the future. There are several ways of further development. Several possibilities are being considered: increasing pension age, reallocation of part of the insurance contribution from the pension funds to the first pillar, introduction of the Canadian system, etc. Whatever steps are to be taken further, they need to be a result of a serious debate that should lead to political and social consensus.

euinside: What are the right steps Bulgaria should undertake in order to reform its pension system?

Anna Janiszewska-Nietubyć: Such serious decisions must be taken only after a serious political and social debate. The most important thing is such a reform not to be postponed because this might have a disastrous impact on the stability of the pension system.