Government proposals for pension system reforms continue to spark controversy

While reforms of the pension system for the police, prison officers and other uniformed services have been agreed, there is controversy over recent changes in the law on combining a full-time job with receipt of a pension. The social partners are also critical of the government’s return to proposals that most of the contributions currently given to privately owned pension funds should be put in individual accounts held by the state-owned Social Insurance Institution.

Background

Since a major reform in 1999, the general pension system in Poland has combined some elements of the defined benefits approach, which is based on the intergenerational solidarity principle, and the defined contributions approach, in which pensions depend on the profit rates of privately accumulated capital and the length of life.

In practice, 12% of an employee’s salary is channelled into the first pillar of the pension system, the Social Insurance Fund administered by the state-owned Social Insurance Institution (ZUS). Another 7.3% goes to the privately run Open Pension Funds (OFEs), which constitute the second pillar (PL0912019I). A third pillar relies on rather unpopular voluntary investment schemes offered by financial institutions on market terms. Police officers, prison warders, members of the National Fire Service (PSP) and members of other uniformed services are covered by separate pension systems (PL1012019I).

In December 2010 and January 2011, the government proposed several changes to the Polish pension system. The proposals for the system’s reform reflect four main factors.

First, because part of the system is still based on the intergenerational solidarity principle, it is sensitive to an increasing demographic imbalance between those who are economically active and contribute to the system and those that receive money from it (PL0708019I).

Secondly, early retirement schemes mean that both the general pension system and special pension systems for the public uniformed services are paying out a considerable amount of money.

Thirdly, the system relies on the transfer of contributions to the privately run OFEs, which themselves generate very moderate profits. As suggested by the report (in Polish, 2.37Mb PDF) published in December 2010 by the Central Statistical Office (GUS):

‘The increase in the OFEs’ assets [in 1999–2010] has been to a small extent generated by their investment activities, but it has resulted from a continuous, legally guaranteed, supply of contributions.’

Fourthly, the total cost of the system is considered an important factor contributing to the increase in the public debt.

Government proposals of the pension system reform

As the right-wing liberal government led by the Civic Platform (PO) faces increasing problems to maintain the level of the public debt below 55% of Poland’s gross domestic product (GDP), it has proposed several changes aimed at reducing public expenditure on pensions.

The government went back to its earlier proposals to redirect a larger part of the contributions from private OFEs to the state-owned ZUS (PL0912019I). On 24 January 2011, the Prime Minister’s Chief Economic Advisor, Michał Boni, presented a new government proposal to ‘correct’ the pension system in Poland. The proposal contained the following elements.

• From April 2011, OFEs would receive 2.3% of an employee’s salary instead of 7.3%. The remaining 5% would be transferred to individual accounts held by ZUS.
• The individual accounts will remain independent of the Social Insurance Fund. The contributions transferred to individual accounts held by ZUS would be indexed according to an average nominal GDP growth rate over the last five years. It is assumed that, from 2013, the proportion of money transferred to OFEs would grow and reach its maximum (3.5%) in 2017.
• Investment limits in the stock market for OFEs would be gradually increased. In 2020, OFEs would be allowed to invest up to 62% of their assets on the stock market instead of the current 40%.
• Money collected in individual ZUS accounts could be inherited by a designated beneficiary and transferred to their individual ZUS account. In case of divorce or separation, the money would be divided between beneficiaries.
• Tax incentives would be offered to those who decide to save in Individual Pension Accounts (the third pillar of the system). Tax relief would amount to 2% of salary in 2012, increasing to 4% in 2017.

Criticism from the social partners

• government assumes that the reform will reduce the public debt by PLN 234 (€59.2 billion as of 23 February 2011), equivalent to 15% of GDP in 2011–2020. However, social partners do not share this optimistic expectation.
• organisations including the Polish Confederation of Private Employers Lewiatan (PKPP Lewiatan), Business Centre Club and Employers of Poland (Pracodawcy RP) oppose the reduction of transfers to OFEs, seeing this as an attempt to drastically weaken or even liquidate the ‘second pillar’ of the system. They propose more fundamental reforms of OFEs which would lower the cost of their operations and increase efficiency.
• Independent and Self-Governing Trade Union ‘Solidarity’ (NSZZ Solidarność) suggests that reforms would only serve the short-term interests of the state, hide the public debt by shifting it to the first pillar of the system and postpone more fundamental reforms.
• All-Poland Alliance of Trade Unions (OPZZ) argues that employees should be free to choose where their contributions to the second pillar of the system go, that is, whether to individual ZUS accounts or OFEs.
• tensions have been caused by the government’s proposal to shorten the time available for negotiations with social partners about the reforms from 30 to 21 days.

Changes in regulations on combining employment and a pension

The government anticipates additional savings in the pension system from changes in the regulations on combining full-time employment with receipt of a pension. In December 2010, the President of Poland, Bronisław Komorowski, signed a new act on the public finances. One of its regulations revoked an order by the Ministry of Labour and Social Policy (MPiPS) dated 8 January 2009 which enabled pensioners to obtain pensions from ZUS without terminating their employment. The new regulation includes the following points.

• Employees who combine jobs with receiving a pension are allowed to keep their pensions if they terminate their employment before the end of September 2011 for a minimum of one day and their employers decide to reemploy them.
• Pensioners who made use of early retirement schemes (younger than 60 years-old for women and 65 for men) are allowed to combine their jobs with receiving pensions if their monthly earnings will not exceed 130% of an average monthly salary in the last quarter of the year. Otherwise, their pension will be suspended. If pensioners’ monthly earnings are higher than 70% of an average monthly salary in the last quarter of the year, their pensions will be reduced proportionally.

Reactions of the social partners

• government calculates that the new regulation will reduce annual expenditure by ZUS by €177 million (PLN 700 million) since it expects the majority of working pensioners to opt for employment. However, social partners have expressed mixed feelings about the new regulation.
• of Poland criticised the new law and argued that retirees who decide to terminate their employment are unlikely to return to work.
• remarked that the changes contradict Poland’s constitution as they question the rule of the inconvertibility of rights. However, NSZZ Solidarność warned that a return to the old legislation would be used by the government to increase the statutory retirement age, which the union opposes.
• Centre Club expressed its support for the limits on combining early retirement with work. However, it also criticised the requirement to terminate employment for those pensioners who had reached their statutory retirement age and wished to continue working.

Continuing talks on pension reforms for uniformed services

Pension reforms for the uniformed services are another attempt by the government to reduce expenditure on pension benefits (PL1012019I). Talks about the changes continued in December 2010 and January 2011.

The government seems to have abandoned earlier projects to include the uniformed public services in the general pension system. Instead, it proposes the following changes.

• Members of the uniformed services would be able to retire after 20–25 years of service instead of the current 15 years.
• The minimum retirement age for the uniformed services would be 50–55.
• Longer employment in the uniformed services would be promoted by a 2.5–3% pension increase for each year after 30 years in service.
• The maximum pension should not be higher than 85% of the final salary.
• New rules would apply to members of the uniformed services who start employment from 1 January 2012. Those already in service could choose between the old system (retirement after 15 years) and the new system.

On 26 January 2011, the trade unions representing members of the uniformed public services met the Prime Minister, Donald Tusk. While no formal agreement was reached, both sides expressed their willingness to start formal collective negotiations in six topic teams. The activities of these teams will be discussed at the first meeting, which is scheduled for 2 March 2011.

Commentary

It is clear that the current pension system requires reform to keep it sustainable in the long run. However, the government proposal to shift part of contributions from OFEs to ZUS has been criticised as a short-sighted attempt to hide real budgetary problems. Since the government has proved rather reluctant to take seriously the alternative proposals and criticism of the social partners, it is likely that pension system reforms will generate further social tensions in the near future.

Adam Mrozowicki, Institute of Public Affairs and University of Wroclaw