B ALANCING SUSTAINABILITY ADEQUACY OF THE PENSION SYSTEM : THE CASE OF N(DC) AND ITS P OLISH VERSION Krzysztof Hagemejer Michał Polakowski ICRA

1 Changing perceptions what is adequate may lead to changes in explicit and implicit social contracts Happens only when person is not able to work anymore? Is a well deserved period of rest after working life? Definition and timing of retirement Guarantee aims only at alleviating poverty for those unable to support themselves? Guarantees every resident a minimum income at old-age? Guarantees also certain proportion of pre-retirement income (replacement rates)? Level of societal guarantees People should save for themselves Those unable to contribute/save should be supported Younger should support old generation Degree of solidarity

Questions to be asked and answered to determine what pension provisions are adequate 2 What is retirement? When retirement may happen? What is the responsibility of the individual and what of the society? What society should guarantee? Should young support the old? Should poor and unlucky be supported? Social contract: What pension system country should have?

Defining pension adequacy ●Adequacy and sustainability are joint and interlinked objectives of social policy ●Adequacy is defined nationally as part of the broader implicit or explicit social contract which sets the design of the pension system ●There are also accepted internationally benchmarks and standards (like ILO Convention no 102 or Recommendation no 202) ●EU OMC: Adequate old-age pension systems should prevent poverty in the old age but also provide income replacement after retirement preventing sharp decline in living standards

Protection of those with broken careers and lower life-time incomes weakened by reforms ●Many new reformed pension schemes which include significant (N)DC component are not just translating differentiation of earnings at the labour market into differentiation of pensions: these differences may actually be amplified ●(N)DC reforms removed from benefit formulas redistributive components key to protect against poverty those with lower earnings and shorter careers ●These changes has not yet been everywhere adequately compensated by increased role of various non-contributory provisions like basic minimum pensions or subsidies to contributions of those caring for children or sick and elderly, unemployed, persons with disabilities etc.

How to prevent from poverty those with lower incomes and those having no possibility to have long unbroken careers? ●Either one should preserve or restore in one way or another the redistributive defined benefit formulas in first pillar schemes, or ●Secure that in the overall pension system there are much stronger than before non-contributory income guarantees (like basic state pension, universal or means-tested) as well as contribution subsidies compensating adequately some non-contributory periods ●To secure sustainability, conditions have to be created to effectively extend duration of working lives and delay retirements

Automatic mechanisms will not replace good policy making in social dialogue ●(N)DC reforms introduce automatic mechanisms to ensure long-run financial sustainability of pensions ●There are no similar mechanisms to guarantee adequacy... ●On the contrary, pension cost stabilization takes place mainly through benefit reductions and other changes potentially detrimental to adequacy (like forcing people to delay retirement even when they are not fit to work or can’t find a job ●Automatism will not replace good policy making through well informed social dialogue based on agreed adequacy targets, balancing shorter and longer term needs as well as benefit adequacy with financial sustainability

One does not need (N)DC reform to sufficiently counterbalance demographic pressure (Projected change of public pension expenditure in GDP percentage points between 2013 and 2060). Source: EU ageing report 2015

One does not need (N)DC reform to counterbalance demographic pressure (Projected change of public pension expenditure due to different factors in GDP percentage points between 2013 and 2060). Source: EU ageing report 2015

Expected change in gross replacement rates in public pension schemes between 2020 and 2060 Source: EU ageing report 2015

Even 40% replacement rate required by Convention 102 will not prevent however poverty for those with low earnings 10

(N)DC can be improved ●Polish version of (N)DC due to: ●Indexation of contribution capital with the wage sum instead of average earnings growth ●Indexation of benefits with only 20% of real wage growth is reducing future benefits much more than – for example – Swedish (N)DC with its automatic balancing mechanism ●NDC sub-accounts indexed with GDP will bring the same result as in the long run wage sum will most probably grow at the same rate as GDP (if share of wages in GDP stays constant) ●Current Polish version of NDC has also no minimum effective minimum pension guarantee mechanism (due to indexation mechanism in force

Expected replacement rates from Polish NDC for different cohorts depending on how contribution capital is indexed (persons retiring at age 67 and contributing continuously for 47 years – own simulations) 12

Comparison of replacement rates in Polish and Swedish versions of NDC for different career patterns (unemployment and short careers) 13

Comparison of replacement rates in Polish and Swedish versions of NDC for different career patterns (women/child brakes) 14

Final note on ageing, NDC and complexity of retirement ●Assumption of automatism of (N)DC, which removes the necessity to increase retirement age ●Strong support by politicians ●However, monetary motives of retirement were criticised at the same time, pointing to the complexity of such decision (family, quality of life, quality of work) ●Still, the one-dimensional vision of retirement dominated the recent debate (and the decision) on retirement age increase, leaving aside policies leading to ‚good aging’ ●Political and social feedback effect, with a destructive potential for the pension system