Aging Polish Society and the Naive Law and Justice’s Pension System Retro-Reform

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There is no doubt that the most crucial long-term issue in Polish economy is the problem of aging society. Today Poles are one of the youngest European nations – according to the 2015 Aging Report prepared by the European Commission, working age Poles (15-64) made up 70.5% in the year 2013 (whereas the EU28 average was 66%). However, these figures are to change profoundly in the years to come – in the year 2060, only 54.1% of Poles will be in working age (the EU28 average will be 56.6%). In other words, in 2013 there were 3.6 Poles aged 15-64 per each citizen older than 65 years but in 2060 the figure will be only 1.6. To make things worse, Poland is one of the worst performers in Europe in the field of labor market participation of older citizens – in 2013, only 44.2% of Poles aged 55-64 either worked or looked for a job (by contrast, in Sweden it was 77%, in Germany – 67.6% and in Denmark – 65,3%).

The shocking numbers mentioned above will have devastating impact on Polish economy. First of all, smaller labor force will cause a significant drop in economic growth (the potential growth rate forecast for the year 2020 is 2.6%, but only 0.6% in 2050). The growing share of senior citizens will also require higher health and welfare expenditures as seniors are more likely to require proper medical care. Consequently, it is necessary for the government to adopt certain policies that are expected to reduce the impact of the Polish aging society.

In fact, such a measure has already been adopted. In 2012, the government of the Civic Platform (centre-right) introduced a law that increased the retirement agree from 60 years (women) and 65 (men) to 67. This policy was intended not only to boost the labor market participation of senior Poles (it has been proved in numerous studies that low retirement age is a rather strong incentive to retire early even if that is not compulsory), the labor force and economic growth , but also to increase their pensions (Poland has adopted a defined contribution system and retirement pensions depend on the sum of contributions paid during the entire career). However, this step was not properly explained to the public and became highly unpopular.

Unfortunately, in 2016, the populist Law and Justice government decided to reverse the reform – the pseudo-economic rationale was the infamous lump of labor fallacy. They wrongly claimed that lowering the retirement age would be a perfect tool to fight youth unemployment – retiring seniors would (in their opinion) leave their jobs for young Poles. However, this step will have a devastating effect on the state of Polish economy. Not only will it reduce the labor force and dampen the economy (it is estimated that the GDP growth will slower by 0.1%), but also hit Polish pensioners hard.

In the worst-case scenario, bringing the retirement age back to the 60/65 level will reduce pensions by 42% (women) and 17% (men). This will, consequently, create even higher demand for political populism and additional welfare spending as it should be kept in mind that in an aging society the political importance of senior voters will also increase. Therefore politicians will cater for their need by taxing workers and providing money for pensioners. The vicious circle of populism will keep turning.

Lukasz Dabros