Poland - The Social Safety Net During the Transition


Poland: The Social Safety Net During the Transition
by Xavier Maret and Gerd Schwartz

This paper argues that the brunt of the reform-induced increase in
Poland's social expenditures has been borne by social insurance arrangements
(mainly pensions and unemployment compensation) rather than by social
assistance schemes targeted to the poor or by more temporary schemes,
largely because of the ease of access to social security and its more
attractive benefit structure. A major policy challenge for Poland will be
to avoid a further burdening of social security by needs that should be
addressed through basic income support and emergency assistance policies or
general transfers (e.g., family allowances). The paper illustrates current
reform needs, using unemployment compensation and pensions as examples.

As regards unemployment compensation, the introduction of flat-rate
benefits and duration limits has addressed some major concerns, but others
remain to be resolved. These include the administration's capacity to
enforce existing rules, the problem of adjusting benefits to inflation,
the limited use of active labor market measures given that labor mobility
is constrained by a severe housing shortage, and issues of fiscal federalism
that arise as the local authorities are forced to take on more responsi-
bility for the long-term unemployed.

As regards pensions, it is estimated that, without reform, costs of the
current pay-as-you-go system will continue to increase significantly and
further threaten the financial viability of the system, notwithstanding
Poland's relatively favorable demographics. Five tasks demand policymakers'
immediate attention. First, the average retirement age should be increased
from the current 55 years to over 60 years, for example by reducing the high
number of disability pensioners, limiting benefits to early retirees through
actuarial adjustments of pension benefits, and further restricting the right
to, and enforcing existing rules regarding the simultaneous receipt of,
pension and wage income. Second, the problem of contribution evasion and
arrears needs to be addressed by increasing enforcement authority and
capacity. Also, introducing employee contributions may help to make
employees more interested in their employer's compliance.

Third, there is no room for special treatment of specific occupational
groups in the form of discretionary adjustments in the pension base or
highly favorable early retirement provisions. Fourth, benefits that do
not address social security contingencies, such as family allowances, should
not be financed through contributions and paid from the pension funds, but
financed from general taxation and paid directly from the budget. Finally,
the mechanism for indexing pensions remains flawed. If the pension system
is frequently hard-pressed to meet its payment obligations, nominal entitle-
ments must change.

As regards more systemic reforms, a public two-tier pension system,
with a flat-rate minimum pension as the first tier and a defined-benefit
second tier, none of it covered by a budget guarantee, would probably

serve the country best. More radical, Chilean-type reforms should not be
considered because they have strong budgetary implications, particularly in
the short to medium term, and could easily increase macroeconomic