NCPA - National Center for Policy Analysis

Poland's New Privatized Pension System

June 8, 1999

April 1, 1999, was the first day Polish workers began making deposits to new individual accounts under a comprehensive Social Security reform package. Although large portions of the old system remain, the reforms create universal access for all Polish workers to professionally managed individual investment accounts, allowing them to benefit from capital markets.

Persons born before January 1, 1949, remain in the old state system, and receive benefits prescribed by law. Those born between January 1, 1949 and January 1, 1969 are allowed to choose between the old and the new systems. Younger workers must join the new system.

  • The old payroll tax for social insurance programs, including medical benefits and pensions, was 45 percent of payroll, paid by employers.
  • For workers eligible under the new system, 9 percentage points of the tax is redirected to new accounts workers can set up with a private investment fund of their choice, closely following the Chilean model.
  • Companies managing private accounts must receive the approval of a newly created regulatory agency, the State Office for Pension Supervision, and so far 19 private companies have received licenses.
  • Pension managers must meet minimum capital requirements, and if they deliver returns significantly below the overall industry average, they may have to make contributions to their customers' accounts from their own capital.
  • Additionally, there is a state guaranty fund to cover any losses due to any bankruptcy of a pension plan provider/manager.

The remaining payroll tax will be used to continue a scaled-down state system. Deposits are held in workers' names, and interest is attributed to them based on the rate of growth of taxable payroll, with the amount of the pension is based on the life expectancy of each worker's age cohort .

The reforms are incomplete, say observers, and Poland retains a large state system. But the reforms represent a great step towards empowering Polish workers and their families.

Source: Krzysztof Ostaszewski (University of Louisville), "Testimony: Poland's Pension Reform," May 25, 1999, International Center for Pension Reform.


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