Pensions, Taxes and Political Interest

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Ageing of the Polish society means that every year more and more people will reach the retirement age. At the same time, the number of people of working age will be decreasing. In this context, it appears that the pension system reform implemented in 1999 introduced a not very fortunate principle to the Polish pension system: the amount of money you now spend on contributions to pension system will eventually come back to you when you retire.

The actual meaning of this principle is of utmost importance to young people. If the pension amount had been dependable on the last few salaries just before retirement, the increase in life expectancy would have led to the increase of the pension spending. As a consequence, such proceedings would have resulted in the necessity to increase taxes, paid mainly by the young working people.

Since the 1999 reform, pension entitlement is calculated on the basis of dividing the sum of premiums paid into the virtual accounts by the potential life expectancy. Moreover, the way in which the premiums paid into Social Insurance Institution (ZUS; or, even more precisely, to the Social Insurance Fund; FUS) are indexed is directly related to the economic situation – a decisive factor in binding the rates of pension amounts paid out by ZUS with the contributions paid into the institution in the first place. In practice, this would mean that the longer period of time when we benefit from pensions as retirees (hence the longer we live) equals lower pension entitlements we would be receiving and not higher taxes on the young working people. Therefore, it appears that the pension reform from 1999 protected Poland from an increase in the taxation of the employment income, which could have led to serious issues on the labour market, and could have affected Polish economy in general.

During the last eight years, the government managed to introduce two major changes, which substantially complement the reform from 1999: first, the retirement age was raised; second, it was accompanied by subsequent restrictions on early retirement. 1999 pension system reform, while protecting the young working people from greater tax burden, led, in fact, to lowering pension amounts. The increase of retirement age implemented in 2013 means that the pension amounts can be higher without the necessity to increase the taxes. The higher retirement age makes us work and pay the premiums to ZUS for a longer time, while we will enjoy higher pension benefits much shorter, as the greater amount of amassed premiums will be divided by the shorter life expectancy.

Unfortunately, since 2011 we are also faced with the negative changes to the pension system, when the main capital base, namely Open Pension Funds (OFE) became largely marginalised. While the first pillar is financed from the current contributions (the premiums are paid regularly each month by the employees and are spent on current pensioners straight away), and the ZUS accounts are based on virtual real time gross settlement, it is OFE that is amassing the actual assets. The stocks and bonds are funded by the collected premiums, and the subsequent sale of these assets is meant to serve as a source of pension payments. Such a structure makes OFE more resilient to any potential demographical changes than other pillars. Unfortunately, in 2014 the state took from OFE over 150 billion zlotys, what (accompanied by the former changes) pushed OFE into a marginal position. As a result, our future pensions will almost entirely depend on the amount of contributions paid by future generations.

Another negative aspect that has come into focus in recent years constitute constant discretionary changes introduced to the pension adjustment, which has clearly stopped serving its initial purpose (to keep the real pension amount in case of inflation) and which, instead, has become a highly politically infused mechanism of redistribution.

And so, throughout the past few years we witnessed both, positive and negative decisions. Needless to say, the demands to further raise the retirement age still occur on a daily basis. What shall we do to prevent the negative changes from popping up in the pension system? No legislation will do the job as (as the history had proved many times before) legislation can always be changed, altered or modified.

Therefore it is of utmost importance that the politicians, regardless of who is currently in power, do not seek to fulfil any political interest of their own by challenging the foundations of the already existing pension system. In order to succeed, we need to raise the social awareness of the underpinnings of the pension system, and most of all, of its two essential factors: 1) the higher are the pension amounts for the retirees, the more likely it is that the taxes for the young will be raised; 2) not raising the retirement age will result in a substantial decrease in the amount of pension benefits. Only when the links between these aspects are noticed by public opinion, will tampering with the pension system stop being politically profitable. The prospect of higher pensions will still attract the elderly, yet, it will at the same time discourage the young. The latter, will obviously immediately be on the lookout for a threat of higher taxes on their horizon. Similarly, faced with the plans to lower the retirement age, we should start raising questions about how such a decision would affect the pension amounts and taxes paid by the younger employees.

We should not forget that there is still a lot to be improved in the area of pension system. The process of calculating the disability pension entitlement should be compatible with the retirement pension system (current legislation may result in a situation when disability pension entitlement will be higher than the retirement pension entitlement; this, in turn, may lead the elderly to becoming more inclined towards claiming the disability allowance rather than retirement pension).

Moreover, the system of indexation of individual accounts in ZUS should be modified to accommodate any potential changes in case of a deeper recession (in other words: so ZUS would not have to go back on its word in case something happens). Beyond any doubt, the question whether miners, farmers, or uniformed services should keep the expensive pension privileges is still to be discussed. And so, the issue of to what extent an average Polish voter is aware of the abovementioned problems comes in – needless to say, it’s not that good. Once Polish electorate has a better understanding of how much money do they actually pay in taxes to preserve the pension privileges of a few strong professional groups, the politicians might eventually come to a realization that preserving special pension entitlements for miners and farmers can prove to be much less politically profitable than they initially thought.

The article was originally published in Polish at liberte.pl

Translated by: Małgorzata Wiśniewska

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