Retirees without pensions and welfare: The social effects of pension privatization in Poland

Abstract

This article describes the chaos caused by the 1999 privatization of the pension system in Poland. The recent measures taken by the right-wing populist government of the Law and Justice (PiS) party, which reduced the retirement age and announced the complete elimination of ‘open’ (private) pension funds at the end of 2016, have not improved the situation of present and future retirees. Various forecasts show that the elderly will not be able to count on state aid in the future. The future of retired women (who tend to be less economically active) and those employed on ‘junk contracts’, from which social security contributions were not deducted, seems to be completely hopeless.

Keywords

Eastern European capitalism neoliberalism private pension funds (OFE)poverty retirement welfare

The systemic transformation in Poland after 1989 was accompanied by gradual privatization and commercialization of many areas of social life under the banner of neoliberalism. Like all Eastern European countries, Poland became a field of expansion and a testing ground for neoliberal capitalism, yet the associated increases in poverty and social exclusion did not provoke any resistance (Żuk, 2010: 45). This encouraged the ruling elite to take further steps in creating a new order.

First, factories were suddenly privatized in the 1990s, causing a sharp rise in unemployment. Later, healthcare was quietly commercialized, as a result of which health became a commodity and access to specialists without having to queue was only possible for a fee (Watson 2011: 53–76). As Hardy (2009: 115) notes, all of these reforms were marked by drastic budget cuts and reduced welfare. Moreover, they were invariably accompanied by decentralization of state responsibility for social policy.

The 1999 pension reform also contributed to the dismantling of the public welfare system. It involved the privatization of the pension system. The establishment of a mandatory funded pillar in the pension system meant that a proportion of the pension contributions collected from the wages of working people was directed to private open pension funds (in Polish: Otwarte Fundusze Emerytalne (OFE)), instead of the pay-as-you-go pillar, in order to invest in the financial market. By doing so, the state waived its obligation to guarantee a certain level of retirement benefits.

In communist Poland, and before 1999, Poland had a defined benefit pay-as-you-go system, whereby current pension payments were financed by the contributions of working people. Pensions were paid by the state-owned Social Insurance Institution (ZUS). Two pension systems were introduced in 1999. They were determined by the year of birth: those born before 1 January 1949 remained in the old system run by ZUS; those born between 1949 and 1968 could choose either of the two pension systems; and those born after 31 December 1968 were obliged to join OFE. In this way, 37.4% of all pension contributions were transferred automatically to privatized OFE accounts. However, there was no fixed indexation rate in this new system; the capital collected was to be increased by investment earnings or reduced by losses and by monthly fees for the management of private pension funds. As described by Oręziak (2014: 110), ‘this reform drastically reduced the amount of retirement benefits paid under the new scheme as compared to those paid under the old scheme’.

What were the reasons for to the privatization of pensions in Poland? What is the fate of present and future pensioners nearly two decades after the reform of the pension system?

The political conditions of the collapse of the pension system

The social security system has always been closely associated with the existing political, social and economic systems. The reform of the pension system was part of the social, economic and political transformation process initiated in Poland and other countries of the former Eastern bloc in the early 1990s. This process provided the opportunity for Western investors and corporations to gain new areas of influence. In such circumstances, in the late 1990s, Poland and Hungary became the first countries in the region, to have their public pension systems largely privatized.

The systemic transformation in Eastern Europe not only involved privatization, but also imposed new labour discipline and a change of mentality; it aimed to produce self-regulating individuals able to react to market changes and devoid of human solidarity (Dunn, 2004). The privatization of the pension system was one of the tools to achieve this goal. Indeed, on the most general level, the introduction of pension reform involved a transition from a defined benefit pension scheme to a defined contribution pension scheme. In other words, it was a transition from a mutual insurance scheme, in which successive generations of working people paid for the pensions of today’s senior citizens, to a completely individualized policy based on the principles of ‘every man for himself’ and ‘as you make your bed, so you must lie on it’ (Woś, 2016: 42).

The privatization of the Polish economy led to a decrease in the number of economically active persons and an increase in the number of illegal workers (people with no employment contracts and therefore not paying pension contributions). This led to a dramatic reduction in social security contributions paid to ZUS and a growing pressure on the state financial system. Furthermore, the number of people retiring due to the elimination of jobs dramatically increased: from 1990 to 1996 they accounted for 40% of all new beneficiaries. This policy gradually increased the burden on social insurance funds, while inhibiting the rate of rapidly rising unemployment. The social security system was treated in that period as a tool for maintaining the social and political ‘peace’ which was threatened by drastic system changes (Kaczanowski, 2011: 175). Those whose jobs were cut became early retirees rather than the unemployed. In this way, unemployment was statistically lower and ZUS was burdened in two ways: the number of pensions was higher and the number of contributions paid to ZUS was lower due to a lower percentage of working people.

Oręziak is right when she draws attention to the fact that the Polish debt in the 1990s became an additional excuse for international financial organizations to put pressure on the political elite in Poland. Under these conditions, it was easier to direct pension reforms towards models desired by supranational financial organizations. The World Bank even sent its representative to Poland, where he was appointed Director of the Office of the Government Plenipotentiary for Social Security Reform (Oręziak, 2014: 196). In this way, Poland was closely monitored by its financial creditors and the fate of future pensioners became dependent on the pension system the government promoted.

The ideological and propaganda assumptions of pension privatization

According to Mitchell A. Orenstein (2008: 180), ‘pension privatization represents a radical path departure from the global pension policy regime established after the Second World War’. In his opinion, the essential objective of pension privatization is to create a system in which pensions are funded through individual, private savings accounts. Pension privatization creates these accounts and increases reliance on them as a means of funding retirement benefits over time. Although it is said that the role of the state in the provision of pensions is limited and the importance of private pension funds for economic growth is emphasized, in practice, the creation of the funded pillar primarily benefits pension fund companies and perpetuates social inequalities (Orenstein, 2008: 180). The reasons for this can be succinctly explained as follows:

High handling charges makes investing in funds completely unprofitable. The reason is obvious: private pension funds have been created to ensure that their owners and managers, rather than future pensioners, will receive profits. As a result, the return on invested money is offset by administrative fees. (Clapham, 2013)

The introduction of the mandatory funded pillar in Poland was accompanied by an extensive propaganda campaign. Its aim was to deter the public from the state pension system (ZUS) by showing that it was in poor condition and might fail in the long run (Oręziak, 2014: 163). Private funds became attractive once the public realized that the only alternative was a bureaucratic behemoth with uncertain pensions and inept social assistance (Żuk, 2006: 43). At the same time, private funds bombarded people with advertisements promising that pensioners would be able to live in hot countries under palm trees. The advertising campaign generally referenced the popular image of a German pensioner who could afford to travel around the world. This had nothing to do with the actual pension system in Germany, which was based on compulsory state pensions and voluntary occupational and private pensions. Nevertheless, the media repeatedly only gave information about the magnificent guarantees of private pension funds and tried to deter people from the state-owned ZUS. As Oręziak writes:

The promise that the replacement rate for a 70-year-old pensioner could reach more than 115% had an unusual psychological effect. This information was used in propaganda advertising OFE in the media and prompted people to make the wrong social choice. … Without a true picture of the effects of the pension reform, the public were not able to adequately respond to the economic and social threats created by the reform. (Oręziak, 2014: 246–247)

As in the case of the restoration of capitalism, people in Poland agreed to accept false ideas, rather than real solutions, during pension privatization.

Privatization under the pressure of the state

The weakening condition of ZUS was a fact, but at the same time it was a self-fulfilling prophecy. The financial hole in the budget of ZUS did not come out of nowhere. Nor was it a simple consequence of demographic decline, though the whole period after 1990 was marked by lower fertility rates – which fell from 2.0 in 1990 to just 1.29 in 2015 (GUS, 2017a: 10). This ‘financial hole’ argument, however, was used in neoliberal propaganda to explain the need to move away from state pensions. And meanwhile the declining fertility rate meant that a decreasing number of working people had to work for an increasing number of pensioners.

However, the financial condition of ZUS deteriorated primarily due to political decisions taken over the last two decades. One of these decisions was to introduce an entrepreneurs’ relief whereby those running their own businesses were given the right to pay lower pension contributions than those working full-time. This was to protect entrepreneurs from excessive state fiscalism. However, with approximately 1.5 million people benefiting from this relief, this affected the stability of the entire ZUS social insurance system (in which approximately 15 million people are currently insured). Farmers are another group of 1.5 million people who do not pay contributions to ZUS. For political reasons, they pay much lower contributions to the Agricultural Social Insurance Fund (KRUS), founded in the early 1990s. Prosecutors and judges (16,000), uniformed services (300,000) and priests (approximately 22,000) are also covered by separate pension schemes (Woś, 2016). Different pension payment rules also result in their differentiation. For comparison, the average monthly pensions in 2014 were as follows: about 476 euros were paid by ZUS, 280 euros were paid by KRUS, prosecutors and judges received 860 euros from the Ministry of Justice and uniformed services received some 810 euros (GUS, 2016).

The role of ZUS also greatly weakened as the labour market rapidly became ‘more flexible’. This was manifested by a growing number of junk contracts of employment and the development of private employment agencies; ‘junk contracts’ are temporary civil law contracts which do not include social security contributions.

The last 15 years have been characterized by a sharp increase in employment through temporary work agencies in Poland. While approximately 110,000 people in Poland were employed in this way in 2000, the number had increased to approximately 850,000 by 2008 (Urbański, 2014). There are no data on the current number of temporary employees, but it can be assumed that there has been an ongoing increase in ‘junk jobs’. In 2015 there were about 15 million working people in Poland and according to data gathered by the Central Statistical Office (GUS, 2017b) the estimated number of those employed on junk contracts was over 1.3 million; other sources suggest that in reality this number exceeds 2 million people (Polska Press, 2015). Those employed on junk contracts cannot hope for any pension in the future.

Social effects

Under the old system, the average pension in the 1990s amounted to approximately 60% of the average salary minus the obligatory social insurance contributions. In the new pay-as-you-go scheme, the replacement rate for those with average incomes ranged from 30 to 40%. The new pension system was favourable to privileged groups with high salaries, including those professionally active throughout their lives, and whose health was not adversely affected by their jobs. In practice, however, this system hit the majority of the population – every break in work and corresponding break in contributions to pensions (sick leave, maternity leave) resulted in a reduction in pension entitlement (Kaczanowski, 2011: 189). Furthermore, the amount that was to be transferred to a personal account in ZUS after 40 years of managing contributions within OFE was not index-linked. For this reason, the relation between the pension granted and the average salary would steadily decline (Kaczanowski, 2011). Similarly, referring to the 2012 European Commission report, Oręziak (2014) states that since pension privatization Poland is among those EU countries where the level of pensions has been reduced most dramatically. Taking into account the replacement rate, pensions in Poland were reduced from 49% in 2010 to 19% in 2060 (i.e. by 62%). Only in Latvia were pensions cut by a greater amount (by 68%) (European Commission, 2012: 129). According to forecasts, pensions in these two countries will be the lowest in the EU in the future. These are averaged data. Some groups like women or those employed on ‘junk contracts’ throughout most of their professional lives may receive even lower pensions or no pensions at all.

Data from the Ministry of Family, Labour and Social Policy (2016) show that women are less economically active than men. While the economic activity rate among all people over the age of 15 was 56.5% in 2015, the rate was 48.6% among women and 65.0% among men. Although women constitute about 52% of the population aged 15 years or older in Poland, they account for only 45% of economically active and more than 61% of economically inactive citizens. Furthermore, the retirement age of women has been reduced by seven years, which will further substantially decrease their future retirement benefits. According to the GUS (2016: 24) data of March 2015, the average pension (arithmetic mean) paid by ZUS was 590 euros for men and 400 euros for women. The median was 430 euros: 540 euros for men and 370 euros for women.

Budget deficit and the patching of holes

The creation of OFE caused a hole in the state budget as a proportion of pension contributions went to open pension funds rather than to ZUS. The resulting hole in the state social insurance fund amounted to some 540 million euros at the beginning of the reform in 1999 and went up to 5.3 billion euros in 2010. In this way, the debt of the state was growing. Interest rates on the debt caused by OFE amounted to 3.4 billion euros in 2012 (Oręziak, 2014: 253). The liberal-conservative government of the Civic Platform (PO) party wanted to save the state budget and so it raised the retirement age in 2012 (from 60 to 67 years for women and from 65 to 67 years for men) and changed the law on open pension funds in 2013 (by reducing contributions to OFE and abolishing the requirement to belong to open pension funds).

After the 2015 elections, won by the nationalist-populist Law and Justice (PiS) party, the new government announced the complete elimination of open pension funds (money from OFE will be probably spent at the discretion of the government) and reduced the retirement age in December 2016 (it restored the previous rule: 60 years of age for women and 65 years of age for men).

In this context, the future of women pensioners is uncertain: they are supposed to work seven years less and so they will receive less adequate benefits from ZUS. Analysts predict that women’s pensions will drop by 30–40% compared to the pensions they would receive if they worked until the age of 67 years. This means that many women, especially lower-paid employees, will receive only the minimum pension. From March 2017, this will amount to 230 euros per month in Poland. Generally, however, the expected future pensions will be approximately 30–35% of final salary. This amount will not allow for a decent life. As a result, retirees will require additional support: labour market researchers suggest that up to 40% of pensioners may be in this position (Solska, 2016: 7).

When patching up the budget deficit in December 2016, the PiS government reduced the pensions of approximately 50,000 former communist security officers (who had acquired these rights previously) down to a maximum of 380 euros under the pretext of accounting for the past. This law aroused great controversy for two reasons: (a) the list of persons affected by this law was established in an arbitrary manner (in addition to former military and police officers, it included members of the Government Protection Bureau and border guards); (b) the law affected those who underwent positive verification in 1990 and had worked honestly for the last 25 years in a democratic system (the law passed by PiS also affects those who worked for even one day in these institutions before 1989).

Private solutions to public problems

In the chaos of a decaying pension system, Polish society has adopted private solutions to social security problems. Some of these strategies were already practised by people in the 1990s when all sectors of the economy were undergoing privatization or liquidation. Katrzyna Gawlicz and Marcin Starnawski illustrated this process with the example of poor women from Walbrzych (the fallen city of the former coalfield). When the mines closed down and the collapse of the local labour market marginalized thousands of people, the state did not provide them with any help. What strategies did these people adopt? This can best be seen from the point of view of those experiencing poverty. Based on interviews with women from Walbrzych, Gawlicz and Starnawski (2010: 143–180) identified the following individual strategies: limiting spending on personal needs, borrowing from friends and relatives, giving personal items to the pawnshop, performing illegal/informal work, ‘going from house to house’ (begging for help), economic migration to another city and, finally, economic migration to another country, which has been the most common strategy in areas of poverty in Poland in the 21st century.

Economic migration abroad not only applies to young people. It is being observed that female retirees are also migrating to work abroad. In November 2016, the influential weekly Polityka described this phenomenon, giving the example of older women who work as domestic help (though some of them need help themselves) in the homes of Italian pensioners (Bukłaha, 2016). Working six days per week without social security, they can earn 800 to 900 euros. According to one of the Polish pensioners, ‘her legs swell, she is no longer young, but she must work. Me and my husband cannot afford medication from our pensions’ (Bukłaha, 2016).

The collapse of the Eastern bloc allowed for the re-introduction of capitalism in Eastern Europe in its most aggressive neoliberal form. Thanks to the elimination of the only viable alternative to the system, the new capitalist order also facilitated the reduction of social gains in Western Europe. However, the disappearance of ‘real socialism’ was meant to be something more: the end of all progressive utopias and debates about possible social and egalitarian alternatives. However, history runs on and it is demanding a bold utopia (cf. Żuk, 2008). The current collapse of the privatized pension system not only encourages but forces people to seek other social security solutions to those offered by neoliberal capitalism. Polish economist Stanisław Owsiak (2011) said that ‘extremely liberal economists and politicians must remember that social insurance (pensions, health insurance) are among the greatest achievements of civilization’. The defence and maintenance of this achievement, however, requires a redistribution of wealth and the pension system is one of the basic elements of redistribution. Pension privatization dramatically reduces inter-generational redistribution and rich–poor or male–female redistribution within pension systems (Orenstein, 2008: 183). Poland is, regrettably, a good example of this mechanism and of those who suffer most when state pensions are privatized.

Footnotes

Funding

This research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.

Author biographies

Piotr Żuk is Professor of Sociology at the University of Wrocław. He has recently published Podziały klasowe i nierówności społeczne [Class divisions and social inequities, Warsaw, 2010], Współczesne oblicza autorytaryzmu [Contemporary faces of authoritarianism, Warsaw, 2014] and O kulturze strachu i przemyśle bezpieczeństwa [On the culture of fear and security industry, Warsaw, 2015].

Paweł Żuk, PhD, is president of Centrum Praw Obywatelskich i Badań nad Demokracją [Foundation Centre for Civil Rights and Democracy Research]. He is the author and co-author of numerous books of which the most recent are: Kultura a polityka. Socjologiczne refleksje o powstawaniu orientacji politycznych w Polsce. [Culture and Politics: Sociological Reflections on the Formation of Political Orientations in Poland, Warsaw 2015] and O kulturze protestu jako rdzeniu tradycji europejskiej [The Culture of Protest as the Core of the European Tradition, Warsaw, 2015].

References

Bukłaha

(2016) Polskie seniorki wyruszają w świat za chlebem. Emigrantki trzeciego wieku [Polish seniors migrate for bread. Third-century female migrants]. Polityka, 22 November. Available at: http://www.polityka.pl/tygodnikpolityka/spoleczenstwo/1683718,1,polskie-seniorki-wyruszaja-w-swiat-za-chlebem.read (accessed 9 January 2017).

Clapham

(2013) Prywatne emerytury – największe kłamstwo rynku [Private pensions: The biggest lie of the market]. Available at: http://forsal.pl/artykuly/736805,clapham-prywatne-emerytury-najwieksze-klamstwo-rynku.html (accessed 9 January 2017).

Dunn

(2004) Privatizing Poland: Baby Food, Big Business, and the Remaking of Labor. Ithaca, NY and London: Cornell University Press.

European Commission (2012) The 2012 Ageing Report: Economic and budgetary projections for the 27 EU Member States (2010–2060). Report. European Economy 2/2012. Available at: http://ec.europa.eu/economy_finance/publications/european_economy/2012/pdf/ee-2012-2_en.pdf (accessed 4 September 2017).

Gawlicz

Starnawski

(2010) ‘To nie jest życie’. Ubóstwo kobiet, perspektywy pomocy i wyzwania miejskiego ładu lokalnego na przykładzie Wałbrzycha [‘This is not life’. Women’s poverty, aid perspectives and challenges of urban local governance in the example of Wałbrzych]. In: Żuk

(ed.) O wspólnocie obywatelskiej w cieniu kapitalizmu [A Civic Community in the Shadow of Capitalism]. Warszawa: Oficyna Naukowa, pp. 143–180.

GUS [Central Statistical Office of Poland] (2016) Retirement and other pensions in 2015. Statistical information and elaborations, 30 November. Available at: http://stat.gov.pl/download/gfx/portalinformacyjny/pl/defaultaktualnosci/5474/10/7/1/wz_emerytury_i_renty_w_2015.pdf (accessed 4 September 2017).

GUS (2017a) Informacja o sytuacji społeczno-gospodarczej kraju w 2016 roku [The socio-economic situation in Poland in 2016]. Report, 30 January. Available at: http://stat.gov.pl/download/gfx/portalinformacyjny/pl/defaultaktualnosci/5498/1/56/1/informacja_o_sytuacji_spoleczno_gospodarczej_kraju_w_2016.pdf (accessed 4 September 2017).

GUS (2017b) Wybrane zagadnienia rynku pracy [Selected issues in the labour market]. Report, 10 January. Available at: http://stat.gov.pl/download/gfx/portalinformacyjny/pl/defaultaktualnosci/5474/9/4/1/wybrane_zagadnienia_rynku_pracy_2015.pdf (accessed 4 September 2017).

Hardy

(2009) Poland’s New Capitalism. London and New York: Pluto Press.

10.

Kaczanowski

(2011) Otwarte fundusze emerytalne (OFE) – sukces czy porażka? [Open pension funds (OFE) – a success or failure?]. Rocznik Żyrardowski 9: 149–168.

11.

Ministry of Family, Labour and Social Policy (2016) Sytuacja Kobiet i mężczyzn na rynku pracy w 2015 r. [The situation of women and men in the labour market in 2015]. The Report of the Ministry of Family, Labour and Social Policy, April. Available at: https://www.mpips.gov.pl/analizy-i-raporty/raporty-sprawozdania/rynek-pracy/sytuacja-kobiet-na-rynku-pracy/ (accessed 9 January 2017).

12.

Orenstein

(2008) Privatizing Pensions: The Transnational Campaign for Social Security Reform. Princeton and Oxford: Princeton University Press.

13.

Oręziak

(2014) OFE. Katastrofa prywatyzacji emerytur w Polsce [Open pension funds. The disastrous privatization of pensions in Poland]. Warszawa: Książka i Prasa.

14.

Owsiak

(2011) Opinia o projekcie zmiany niektórych ustaw związanych z funkcjonowaniem systemu ubezpieczeń społecznych [An opinion on the draft amendment of selected laws related to the social security system]. Opinie Biura Analiz Sejmowych, no. 3946, 17 March, p. 30.

15.

Polska Press (2015) Na umowach śmieciowych pracuje 2 mln Polaków. 15 proc. z nich powinno mieć etat [Two million Poles are employed on ‘junk contracts’. 15 per cent of them should have full-time employment contracts]. Available at: http://www.regiopraca.pl/portal/rynek-pracy/wiadomosci/na-umowach-smieciowych-pracuje-2-mln-polakow-15-proc-z-nich-powinno-miec-etat (accessed 4 September 2017).

16.

Solska

(2016) Ratuj się, kto może [Run for your life]. Polityka, 23 November, p. 48.

17.

Urbański

(2014) Prekariat i nowa walka klas. Przeobrażenia współczesnej klasy pracowniczej i jej form walki [Precariat and the new class struggle. Transformations of the today working class and its forms of struggle]. Warszawa: Książka i Prasa.

18.

Watson

(2011) Fighting for life: Healthcare and democracy in capitalist Poland. Critical Social Policy 31(1): 53–76.

19.

Woś

(2016) Maszyna do produkcji emerytury [A machine for the production of pensions]. Polityka, 22 November: 48. Available at: http://www.polityka.pl/tygodnikpolityka/rynek/1683920,1,jak-sie-zmienialy-systemy-emerytalne-na-przestrzeni-lat.read (accessed 14 January 2017).

20.

Żuk

(2006) Media a kontrola społeczna w czasach ‘wolności rynkowej’ [Media and social control in times of ‘market freedom’]. In: Żuk

(ed.) Media i władza. Demokracja, wolność przekazu i publiczna debata w warunkach globalizacji mediów [The media and power. Democracy, free media and public debate under the conditions of media globalization]. Warszawa: Scholar, pp. 39–64.

21.

Żuk

(2008) O pożytkach z utopii w życiu publicznym i naukach społecznych [The benefits of utopias in public life and social sciences]. In: Żuk

(ed.) Spotkania z utopią w XXI wieku [Meeting with utopia in the 21st century]. Warszawa: Oficyna Naukowa, pp. 49–60.

22.

Żuk

(2010) Realne podziały i pozorne wspólnoty [Real and apparent community divisions]. In: Żuk

(ed) Podziały klasowe i nierówności społeczne. Refleksje socjologiczne po dwóch dekadach realnego kapitalizmu w Polsce [Class divisions and social inequities. Sociological reflections on two decades of real capitalism in Poland]. Warszawa: Oficyna Naukowa, pp. 40–51.