Old-age pension benefits in Poland – do they meet changing needs of the

retired?

Joanna RuteckaInstitute of Statistics and Demography

Warsaw School of Economics,Polish Pension Group SGH

Outline of the presentation

1. Old-age pension benefits in Poland – basic characteristics

2. Three „seasons” of old-age

3. Pension gap

4. Filling the pension gap

5. Conclusions

Old-age pension benefits from public system in Poland

- defined contribution formula (NDC and FDC)

- benefit level depending on:- individual account balance- age of retirement

- annuity

- replacement rate: 35%-50%

Old-age pension benefits in Poland

Assumptions: an insured starts working at 23 and earns an average wage; real indexation of pension entitlements 2.5% p.a.; real wage growth 2.5% p.a.Source: Góra & Rutecka 2012.

60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 750%

20%

40%

60%

80%

100%

120%

140%

25%

23%

21%

19,52%

Age

Repl

acem

ent r

ate

The effect of mixed indexation (inflation+20% real wage growth) on replacement rates in Poland

67 68 69 70 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 1000

1000

2000

3000

4000

5000

6000

7000

8000

0%

10%

20%

30%

40%

50%

60%

replacement rate

average wage

pension benefit

PLN

AGE

Assumptions: an insured earns an average wage and retires at 67; real indexation of pension entitlements 2.5% p.a..; real wage growth 2.5% p.a.Source: Rutecka 2015.

Sources of income in old age (PolSenior 2012)

• Public pension is the main source of income for:• 95% of retired men• 80% of retired women (18% receive survivor’s pension)

• 30% of male pensioners and more than 50% of female pensioners receive benefit below social minimum (PolSenior, Błędowski 2012)

• The relative level of benefit decreases with age (diminishing adequacy) – an average benefit of retirees aged 95 is much lower than those aged 75.

• The retired receiving an old-age benefit up to PLN 1000 (ca. 240 euro) are mostly women; many of them run single-person households

Three „seasons” of old-age

Source: own collaboration based on: DC Lessons from around the globe, Mercer Global, 2014.

Change in needs/consumption

„active” retiree (65-75)

„sedate” retiree (75-85)

„frail” retiree (85+)

I II III

Changing needs of the retired

I – „active” retiree• high social activity, making dreams come true (travelling, devoting time to hobbies)• good health and high physical activity (recreation, sports)• helping family, taking care for grandchildren

II – „sedate” retiree• moderate social activity• moderate physical activity • relatively good health, some diseases but still able to perform most activities of daily living

III – „frail” retiree• limited social activity• poor health• inability to perform many activities of daily living• increasing spending on medical services

Changing consumption of the retired (GUS 2014)

Expenditures by type

Expenditures per capita in employees’ households

Expenditures per capita in retirees’ households

PLN Share in total expenditures

PLNShare in total expenditures

Consumption goods and services, total

1010.71 100.0% 1131.32 100.0%

Food 248.81 24.6% 324.78 28.7%Alcohol, tobacco, drugs 27.80 2.8% 29.56 2.6%

Clothing and shoes

59.51 5.9% 36.46 3.2%

Housing costs including energy

203.55 20.1% 286.07 25.3%

House equipment and running the household

50.77 5,0% 51.53 4.6%

Health

41.87 4.1% 101.92 9.0%

medical equipment and drugs 25.63 2.5% 78.13 6.9%

medical services 16.23 1.6% 23.79 2.1%Transport 114.73 11.4% 81.02 7.2%Communication

56.13 5.6% 55.51 4.9%

Recreation and culture

74.12 7.3% 62.64 5.5%

Education

16.23 1.6% 2.43 0.2%

Restaurants and hotels

33.78 3.3% 18.79 1.7%

Other expenditures, including:

62.44 6.2% 68.26 6.0%

social assistance

0.92 0.1% 1.34 0.1%

insurance

17.63 1.7% 22.42 2.0%

life insurance

7.20 0.7% 9.74 0.9%

health insurance 1.15 0.1% 0.94 0.1%Pocket money

20.96 2% 12.35 1.1%

Pension gap

Źródło: own collaboration based on: DC Lessons from around the globe, Mercer Global, 2014.

„Active” retiree (65-75)

„sedate” retiree (75-85)

„frail” retiree (85+)

Needs/consumption

Pension gapPension gap

Pubic old-age pension benefit

How to fill pension gap?

„Active” (I) and „sedate” (II) period of old age:• extending working life (full employment or combining part-time

employment with partial old-age pension), • supplementary savings for old-age

„Fragile” old age (III):• supplementary savings• long-term care insurance (longevity insurance annuity?)

Conclusions1. Standard forms of old-age pensions offer flat level of real benefits in the long term

while the consumption (needs) is similar to „U” shape.

2. Old-age is not homogenious and consists of three „seasons”: (I)„active” retirement, (II)„sedate” retirement and (III) „frail”retirement.

3. There is a contradiction between decreasing relative level of pension (replacement rate) and increasing needs in old age.

4. Pension gap appears largely in the first and the last „season” of old age. While it can be rather easily filled in the first stage, the incufficient income in very old age is a serious problem to tackle.

5. The pension gap can be filled by extending working life, saving for old age or long-term care insurance (longevity insurance annuity).

6. Special focus have to be put on alleviating poverty at the age of 85+. This risk is especially high for older women living in a single-person households.

Thank you for your attention.

Joanna RuteckaPolish Pension Group

Warsaw School of Economicsjoanna.rutecka@sgh.waw.pl