20 June 2008

Polish pension reforms deemed ‘incomplete’

The recent Polish pension reforms have been a welcome measure, though branding it as “incomplete”, the OECD calls for further stringent reviews.

In its latest economic survey of Poland, the OECD said keeping older workers in the labour force at least until statutory retirement age is still proving difficult for the nation, so more should be done to encourage people to work longer.

Secondly, further cuts in the 'labour tax wedge' are necessary, since Poland remains above the OECD average – despite recent reductions – contributing to low employment rates in the official sector, particularly among low-skill workers.

The OECD defines the 'labour tax wedge' as the sum of personal income tax and employee plus employer social security contributions, together with any payroll tax less cash transfers, expressed as a percentage of labour costs.

“To a large extent, this reflects high rates of social security contributions used to finance basic public pension regimes, which, combined with other income-support schemes (including early-retirement and disability benefits), lead to a low effective  retirement age,” stated the report.

These cuts, suggests the organisation, could be partly-funded by reforming early-retirement pensions, though other sources of financing will need to be tapped.

The authors welcomed recent pension reforms which saw a shortening of the list of professions eligible for early retirement, though stressed more measures are needed to make the system sustainable.

The pension system introduced in 1999 - which combines a mandatory notional defined-contribution first pillar with a compulsory fully-funded second pillar based on individual accounts - is largely neutral from an actuarial perspective, according to the OECD.

“Thus, it creates financial incentives to continue working beyond official retirement age. However, the new system will have its full effect only once the cohorts who were not yet 40 at the time of the reform approach retirement age (ie in the mid-2020s).”

The reform is described as being "incomplete” because it still allows too many people to benefit from the costly  early-retirement schemes.

In principle, these temporary pensions are designed for people over 50 who are deemed unable to perform their tasks until official retirement age because of special working conditions. In practice, however, the list of occupational categories eligible is so vast that the number of beneficiaries exceeds one million people , or nearly 6% of labour force.

The pension reform has replaced early-retirement schemes with “bridge” pensions, which should have been implemented in 2007 as a kind of temporary entitlement for a much more restricted number of employees, though the introduction was postponed in the face of strong resistance by some workers, such as coal miners, teachers and railway workers.

“Meanwhile, the labour force participation rates of workers aged 55-64 continued to decline in 2005 and 2006 despite favourable labour-market conditions, in contrast to developments elsewhere in the region,” the study noted, arguing this has been prompted to a certain degree by the premature withdrawal of many workers who feared losing entitlement to early-retirement benefits.

The report also gauges the abolition of the special pension regime for farmers, suggesting their income be subjected to personal taxation. In this case “reforming the pension regime should be seen as more pressing”, according to the authors.

“A more complete reform would also involve the integration of the special pension system for farmers into the general regime,” stated the report, acknowledging, however, it is a sensitive area and changes should not be introduced with a view to realising short-term budgetary gains, but rather be motivated on efficiency and equity grounds.

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