Why has Poland’s retirement age been lowered?

Over the last few quarters lowering of the retirement age has been a topic of a lively discussion among not only amongst politicians but also economists and sociologists. First, it is necessary to look objectively at the economic impact of this decision. According to Eurostat forecasts, due to the ageing of the population, even without the lower retirement age the working age population in Poland would sharply decrease in the long term (by over four million people before 2050, i.e. almost 20 per cent). The lowering of the retirement age will accelerate this decline up to over six million people in the same period – almost 30 per cent of the working population. It is a simple correlation – retired persons show lower professional activity, which is conducive to a reduction in the workforce.

The decrease in the workforce leads to slower GDP growth. However, the scale of the slowdown in the medium term, compared to the scenario without lowering of the retirement age, will not be significant. According to a joint report by WiseEuropa and the Association of Polish Economists, the annual economic growth dynamics in the scenario with lower retirement age (on average 2.13 per cent in the period 2017-50) will, on average, be lower by only 0.14 pp than in the scenario with the previous, higher retirement age (2.27 per cent).

Bad for growth

Lower labour supply is also conducive to a decline in budget tax revenue (PIT and VAT in particular) and lower revenue from health and social insurance contributions. At the same time, the state must incur costs resulting from the necessity of paying the minimum pension. The minimum pension is granted to persons with sufficiently long employment periods, which entitles them to obtain pensions while the contributions that they have paid in are not sufficient to finance such a pension. The resulting public expenditure will increase in subsequent years due to an increasing life expectancy ratio. Considering the factors outlined above, the lower retirement age will have a negative impact on the general government balance in the medium term. In accordance with the estimates of the Ministry of Finance and ZUS, the cost of lowering the retirement age amounts to over 10 billion zloty (0.5 per cent of GDP) annually in the coming years.

Once we have established that the decision to lower the retirement age is unfavourable for the public finances and long-term growth prospects, we can move on to the opinion of the public. According to a CBOS survey conducted in 2017, 78 per cent of Polish people supported the decision to lower the retirement age. This is when the situation gets unusual. Even though the majority of Poles prefer to retire early, the latest data show that after the lowering of the retirement age, the number of working or self-employed retirees has increased significantly – by over 90,000 in 2017. It means that despite supporting lower retirement age, a large portion of retirees returned to the labour market.

Such a phenomenon can be explained by a combination of two factors. First, it may reflect the entrepreneurship of Poles, who treat the possibility of working after retiring as kind of a loophole allowing them to increase their income. Historically and culturally, Poles always took pride in their ability to ‘outsmart’ the government, especially in the case of financial affairs. After reaching retirement age they terminate their existing employment contract, officially retire, and come back soon and start new employment at the same position. This is beneficial for both parties – the employee will receive additional income and the employer is able to negotiate a lower wage paid for the same work. What is more curious is that such actions are permitted by law. People are allowed to take a pension and work at the same time.

Second reason is that high support for the lower retirement age most likely reflects the general reluctance of Poles to work in older age, rather than an in-depth analysis of their decision on their own financial situation. A majority of people likely did not carefully consider how significantly their income would change after retiring – the pension amounts to only a fraction of their last salary. Without previously accumulated savings, such situations simply cannot be sustained. This is why most retirees – out of necessity – decide to continue professional work in order to maintain (or limit the drop) of the previous standard of living.

Working retirement

I believe that the phenomenon of working during retirement will gain importance in the coming years. According to OECD projections, the average net pension replacement rate in Poland equals 34 per cent for women and 39 per cent for men. In other words, the income of a young person who has currently entered the labour market will drop by over 60 per cent compared to their last salary after retiring. It seems that the public is partially aware of this problem as according to the CBOS survey, more than a half of respondents expect lower pensions (56 per cent) in the future, of which almost two-fifths of the total (38 per cent) believe that future pensions will be much lower than at present. Only 11 per cent think that pensions in relation to earnings will be higher in the future than at present. It is unlikely that people will forfeit the possibility to increase their income received during retirement by not working.

All things considered, strengthening of the aforementioned tendencies will (if it has not already) lead to a twisted situation, in which the retirement age is just a symbolic number without any further meaning. On the one hand, the majority of fresh retirees will ignore it and continue to work. On the other hand, the government will allow such a situation. One must remember that each working retiree is contributing to the improved situation in the public finances by paying social contributions. So in fact neither of the parties concerned will pay much attention to it. If so, we have to ask ourselves, why has the retirement age been lowered in the first place?

The views expressed in this opinion editorial are the author’s own and do not necessarily reflect Emerging Europe’s editorial policy.