Lowering the Retirement Age in Poland: Costly Long-Term Consequences

Noel Feans via flickr || CC

Civic Development Forum (FOR) has repeatedly voiced its opposition to lowering the retirement age in Poland to 60 for men and 65 for women (from the age of 67, which was a target age implemented by the previous government to be gradually reached in 2020 by men and 2040 by women). We pointed out that shortening time of employment and longer period of retirement would lead to very low pensions, higher tax burden on workers, and slower economic growth (see “Reduction in retirement age: Losses for future retirees, employees and the economy” – in Polish).

Lowering the retirement age is contrary to the plan of Mateusz Morawiecki, Minister of Economy, which rightly linked in one of the documents the decline in working-age population with a slowdown in economic growth. It will put a drag on catching up with the Western Europe’s living standards and as a result young Poles, burdened by higher taxes, will continue to emigrate.

The full negative impact of lowering the retirement age will not be visible immediately. As a result of the reduction in retirement age, in 2017 an additional 331,000 people will acquire pension rights in ZUS (Social Insurance Institution). Apart from ZUS, Polish system features also KRUS (the Agricultural Social Insurance Fund) and other smaller pension systems, so the actual effect will be much greater. In 2017, as many as 663,000 more people in the working age will retire than in the previous scenario of raising the retirement age.

How this new retirement age will be financed? In 2018, ZUS expenditures will be financed by the injection of funds from the OFE (private pension funds – the 2nd pillar of the pension system), as lower retirement age will mean an acceleration of transfers from OFE to ZUS within the so-called safety slider. Moreover, we observe a rapid increase in contributions due to a good state of the labor market. The first source of financing is one-off – in the coming years there will be no additional funds from the OFE (unless the government decides to complete its nationalization as it was done in Hungary in the past). The second source of financing is related to the current boom.

The economy is growing cyclically – in times of good economic conditions the income of ZUS increases, but in periods of economic slowdown income from contributions rapidly halts or even falls. Therefore, higher contributions today are not a permanent source of financing this anti-reform.

Increasing life expectancy, combined with a record low retirement age (primarily for women), will mean a rapid increase in the number of pensioners receiving minimum pensions. This will lead to increased political pressure for changes in the pension system, which will have to be financed by higher taxes on working people.

This is why Civic Development Forum opposed lowering of the retirement age. We perceive this policy as another long-term threat to the rate and stability of growth of the Polish economy.

Rafal Trzeciakowski