By the end of 2023, a total of 20.5 million people were covered by Poland’s pension system under the second and third pillar. Total funds accumulated on these accounts amounted to 282.9 billion PLN, with Open Pension Funds (OFEs) accounting for the majority – according to data from the Polish Financial Supervision Authority (KNF). The third pillar, which includes e.g., Employee Capital Plans, individual pension accounts or individual retirement accounts, is still not very popular. This means that a significant portion of those working will receive their pension benefits solely from the Social Insurance Institution (ZUS). “Pensions from the public system are not a fortune. They exist to ensure a certain necessary minimum. We must take care of the rest ourselves,” assesses Agnieszka Łukawska, an expert at the Pension Institute.
“Our pension system is a so-called defined contribution system. It is based on the fact that employees pay contributions for pension insurance and the pension will be financed from these contributions in the future, which colloquially means that the more I save, the more I will have in the future. The level of the pension contribution is 19.52% of the salary. It is evident that I will save just over two salaries in a year with the pension contributions, so there will not be a lot of excess pension from this,” says Agnieszka Łukawska of the Newseria Biznes agency. “Rather, one should think about what to do to be able to increase the level of benefits received in the so-called autumn of life.”
The aim of the 1999 reform of the Polish pension system was to ensure the stability of public finances in the face of unfavorable demographic trends. However, the introduction of a defined contribution system led to a decrease in the average replacement rate. The Pension Institute reports that between 2014-2020, it fell from 52.5 to 42.4%. This means that after retirement, a person will receive a benefit less than half of their last salary. To meet the minimum standards of the International Labor Organization, the pension system should ensure the granting of benefits not less than 40%. IE’s calculations indicate that the Polish pension system will soon fail to meet these standards, and the benefits paid out will be grossly inadequate.
“Changing the entire system is not easy. Any decisions taken now will have repercussions in a few decades,” points out the expert from the Pension Institute. “All new ideas, even if we agree that they are worth considering or implementing, may apply to those entering the labor market. However, those who have been on this market for several years, who pay pension contributions, have entered into a kind of social contract and will have their pensions guaranteed on these, and not other principles.”
In his report “How to take care of old-age protection for low-income people?”, Jarosław Oczki from the Nicolaus Copernicus University in Toruń assesses that by 2060, the replacement rate may drop to 28.7% (with a retirement age of 67 years) or to 18.7% (with the current retirement age of 60/65 years). The report shows that returning to a lower retirement age (to 60/65 years) meant that a 60-year-old woman will get 77% of the pension due to a person retiring at 67 years old (a decrease by almost ¼), while a 65-year-old man will get 92% of a pension due to a person at 67 years old.
“We often like to compare ourselves to others, but in the old Union countries, the retirement age is often higher than in Poland, often the same for women and men, and generally hovers around 65 years, and in bursts 67-68,” says Agnieszka Łukawska.
In the future, even half of the pensions will need to be subsidized from the budget to bring them up to the minimum level.
“With the design of the system we have, that the contributions of the currently working finance the pensions of the current beneficiaries, there is not much that can be changed. Pension payments from the Social Insurance Fund are guaranteed by the state. Currently, the contributions cover about 84-85% of the payments. The rest is subsidized from the state budget. Therefore, as there will be fewer people paying contributions, the government will have to chip in more, but there is not much that can be done about it at the moment,” the IE expert explains.
As the Social Insurance Institution (ZUS) reports, the situation in the Social Insurance Fund is currently stable and expected to remain so in the coming decades. Though it’s indicated by OECD’s report (“Pensions at a Glance 2021”) that the proportion of public retirement and disability expenditures in Poland’s GDP in 2060 will be roughly the same as in 2019 – 10.8 versus 10.6 – despite adverse demographic changes . ZUS’s forecasts indicate that in 2023, there were approximately 390 people of post-productive age per 1,000 working people. By 2061, this will be 806 people.
“There is no point in reforming the SIF in its present shape. However, we must take care to introduce mechanisms, incentives, but effective ones, so people would save extra money for the future,” assesses Agnieszka Łukawska.
According to Mercer CFA Institute Global Pension Index (MCGPI), which compares 47 pension systems, Poland took the 29th place with a score of 57.6 out of 100 points. Our country has been consistently getting a lower position in the ranking every year since 2020. We lose the most in the category of long-term solvency (45.4 points and 34th place in the ranking). To aspire to be among the countries with significantly better pension systems, we would need to score at least 65 points, a change requiring significant efforts, especially in areas such as the value of pension assets (in relation to GDP) or the level of participation in employee capital plans.
“People don’t understand that additional savings are necessary. We lack a culture of saving, financial planning, and using products that have been available for years and still allow for tax relief,” says the expert. “There are no crowds keen to use these products. I think this is a matter of public education. I know that a civic education project is to be introduced in schools next year. From the earliest stages of life, we need to tell people that retirement is a time that we need to prepare well for. While working, we pay contributions as a form of social solidarity, so that we have bread in old age, but unfortunately, we have to earn more by ourselves.”
According to the “Report on the State of the Pension Market in Poland at the end of 2023” by the KNF, at the end of 2023, 20.5 million people were covered by the pension system in Poland under the 2nd and 3rd pillar. OFEs, which manage over 74% of the assets in the Polish pension product segment (net assets of 208.1 billion PLN and 14.5 million participants), have the largest share. By the end of 2023, there were 859.9 thousand Individual Retirement Accounts (IKE), with assets worth 18.2 billion PLN, while the number of individual retirement security accounts (IKZE) was 514.7 thousand, and the value of accumulated assets was 9.2 billion PLN. In over 2 thousand Employee Pension Programs (EPP), 675.6 thousand people participated, and the accumulated funds reached a value of 25.6 billion PLN. Meanwhile, the number of participants in Employee Capital Plans (ECP) reached 3.9 million at the end of 2022, who saved 21.8 billion PLN in their accounts. Participation in ECP now reaches 48.38%.
“It seems that countries like the Netherlands or Iceland, which are at the top of the Mercer ranking, have good pension systems, they are doing well. For example, in Luxembourg, a pension is around 6,000 euros. This is not something that we can just duplicate. It may not be particularly popular, but let’s simply work legally, pay contributions and do not forget to save or invest from an early age thinking about the autumn of life. Here, nothing smarter has been invented, nowhere it is like for the money from social insurance we will be rich in old age,” emphasizes Agnieszka Łukawska.
