How does the Pension system work in Poland?

Question

I've been reading articles I found in chat about the Polish pension system and how it is changing. (Chat room: http://chat.stackexchange.com/rooms/22/show-me-the-money)

I'm trying to understand how the Polish Pension systems work in terms I can understand coming from the United States.

It seems there are 3 parts: (primarily based on this article)

1. Mandatory Pension
2. Mandatory Individual Contribution
3. Voluntary Contribution

I believe that if you make no elections as a Polish citizen in gainful employment, you'll get 1+2 on the list above.

I also believe that the news stories describing the change to Polish retirement have something to do with #1 and #2, but I'm not sure what.

News stories from the chat room: 1 2 3

What is the "normal" Polish retirement system and what is changing? It sure sounds like something is being taken away from the individual, but I can't figure out what exactly. Would my balances change on my accounts? Are they changing the likelihood of meeting a defined benefit in the future?

Answer 1

Pretty simple actually.

1. This is a state-run defined benefit plan, where the benefit is calculated based on the length of the employment and the contributed amounts. This is what in the US is known as the Social Security.

2. This is a defined contribution plan, where the employee can chose the level of risk based on certain pre-defined investment guidelines (more conservative or more aggressive). In Poland, it appears that there's a certain amount of the state-mandated SS tax is transferred to these plans. Nothing in the US is like that, but you can see it as a mandatory IRA with a preset limited choice of mutual funds to invest into, as an analogy.

   The recent change was to reduce the portion of the madatory contribution that is diverted to this plan from 7+% to 2.3% (on account of expanding the contribution to (1)). Probably the recent crashes of the stock markets that affected these accounts lead to this decision.

3. This is voluntary defined contribution plan, similar to the US 401Ks.

This division is actually pretty common, not unique to Poland. I'd say its the "standard" pension scheme, as opposed to what we're used to in the US.

Answer 2

littleadv's answer gives a concise summary of the system as it stands now, but much more changed than just the portion of the mandatory contribution that was diverted to the private plan. In broad terms, the balances of your accounts and your future benefit won't change. It's only the source of these benefits that's changing.

The Bloomberg article describes the changes this way:

The state will take over the amount of bonds that pension funds held as of end of Sept. 3 and turn them into pension liabilities in the state-run social security system... The state will assume control of 51.5 percent of pension-fund assets, including bonds guaranteed by the government and “other non-stock assets”

After the change, Polish workers that held bonds in the private portion of their retirement portfolios will instead have more payments from the state-run pension system. The balances of your retirement portfolio and your future benefits shouldn't change, but the reality may depend on how the state pension system is managed and any future changes the government implements.

The effect this change will have on future benefits isn't clear, because the change may simply delay the problem of high levels of outstanding sovereign debt, not solve it. The government stated that because increasing numbers of workers invested their money in private pension funds, less money went into the government's fund, which forced them to issue sovereign debt in order to cover the shortfall in their current pension liabilities.

The government's recent cancellation of government bonds in the hands of private pensions will decrease their overall outstanding debt, but in exchange, the government is increasing its future pension liabilities. Years down the road, the government may find that they need to issue more sovereign debt to cover the increased pension liabilities they're taking on today. In other words, they may find themselves back in the same situation years down the road, and it's difficult to predict what changes they might make at that time.