The distributional effects of the pension system reform in Poland

Jarocinska, Elena; Ruzik-Sierdzińska, Anna Article The distributional effects of the pension system reform in Poland IZA Journal of Labor Policy Provided in Cooperation with: IZA – Institute of Labor Economics Suggested Citation: Jarocinska, Elena; Ruzik-Sierdzińska, Anna (2023) : The distributional effects of the pension system reform in Poland, IZA Journal of Labor Policy, ISSN 2193-9004, Sciendo, Warsaw, Vol. 13, Iss. 1, pp. 1-21, https://doi.org/10.2478/izajolp-2023-0002 This Version is available at: https://hdl.handle.net/10419/298782 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Elena Jarocinska1,* and Anna Ruzik-Sierdzińska2 The distributional effects of the pension system reform in Poland Abstract This paper quantifies the effect of Poland’s 1999 pension reform on the inequality of future pension benefits. The reform increases inequality, both in the upper and lower parts of the distribution. The estimates, based on the 2012 Polish Household Budget Survey, show that the Gini coefficient reaches 0.27 once the full effect of the reform has materialized. Had the pre-reform system continued unchanged, the Gini coefficient would not be >0.19. The increased inequality of pension benefits is the result of the system gradually moving from a more redistributive defined benefit pension system to a system in which benefits are strongly linked to earnings. We show to what extent minimum pension benefits mitigate the increase in inequality under different scenarios. Current version: October 26, 2022 Keywords: pension, inequality, replacement rate, minimum pension, microsimulation JEL codes: H55, J26, I38 Corresponding author: Elena Jarocinska [email protected] Jarocinska and Ruzik-Sierdzińska. IZA Journal of Labor Policy (2023) 13:02 © The Author(s). 2023 Open Access This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made. Cite as: Jarocinska and Ruzik-Sierdzińska. IZA Journal of Labor Policy (2023) 13:02. https://doi.org/10.2478/izajolp-2023-0002 1 CASE – Center for Social and Economic Research, Warsaw, Poland 2 Department of Economics I, Collegium of Economic Analysis, Warsaw School of Economics, Warsaw, Poland and CASE – Center for Social and Economic Research, Warsaw, Poland Page 2 of 21 Jarocinska and Ruzik-Sierdzińska. IZA Journal of Labor Policy (2023) 13:02 1 Introduction As a result of the 1999 pension reform in Poland, the more generous and redistributive pension system was replaced with an earnings-related rule. The old pension system can be classified as a Beveridgean system since the benefit formula partially consisted of a flat rate, and the postreform system as a Bismarckian system (Esping-Andersen, 1990). The Beveridgean system is highly redistributive and achieves a high degree of equalization of benefits, whereas under the Bismarckian system, little redistribution occurs (Cremer and Pestieau, 2003). The amount of redistribution in the pension system in turn affects the levels of inequality and poverty among elderly people. As pension reforms have become common in industrialized countries due to population aging (OECD, 2017), the distributional effects of these reforms for the elderly are a key question for economists and policymakers. This paper quantifies the effect of Poland’s 1999 pension reform on future pension benefits inequality.1 We present simulations of first pension benefits for men born in the years 1969–1979 using the Polish Household Budget Survey (PHBS) of 2012. The cohort of 1969 is the first that will retire entirely under the new system and we extend the analysis to the subsequent 10 cohorts to analyze the gradual implementation of the reform.2 The simulations are based on earnings predictions using a standard earnings equation.3 Micro data allow us to study the effects of the reform in different parts of the pension benefits distribution. We compute two measures of within-cohort inequality – inequality in Gini coefficients of first pension benefits and replacement rates (RRs) – under the pre-reform and post-reform legislations. Thus, we can compare the inequality of pension benefits after the reform and in the absence of the reform. Understanding inequality of pension benefits is important because of at least two reasons. First, rising inequality leads to growing demand on public finances, as the lowest pensions need to be topped up from general taxation if a country has a minimum pension or minimum income guarantee (Weller, 2004). Second, an increase in inequality in the lower part of pension distribution contributes to relative poverty. The elderly in Europe and worldwide are facing higher risks of poverty compared with the working-age population (Antczak and Zaidi, 2016). Although the risks of falling into poverty for elderly Polish citizens are currently lower than in many other European countries, this is likely to change in the future as more people covered by the new pension system will retire. Accordingly, as the standards of living of many elderly citizens are likely to decrease, policymakers need in-depth knowledge about the income distribution of current and future retirees, so that they can target their social policies toward the most vulnerable. In the literature, two types of income redistribution are distinguished: intergenerational and intragenerational redistribution (Danzer et al., 2016). To measure intergenerational redistribution, researchers compare, over the life cycle, the receipt of benefits relative to taxes and contributions paid for successive date-of-birth cohorts. The intragenerational redistribution measures whether pension programs are more or less redistributive within a generation. 1 Throughout this paper we use the terminology “pension reform” referring to the social security reform that replaced the existing pay-as-you-go scheme with a multi-tier system. While in the US and UK systems the term “social security” refers to government programs and “pension” refers to private programs, the Polish multi-tier system contains elements of both, and so we follow the previous literature (Chłoń-Domińczak, 2002; Lachowska and Myck, 2018) and refer to this as pension reform. 2 We focus on men because there are data restrictions for women. See the discussion in Section 3. 3 See, e.g., Heckman et al. (2003) and Lemieux (2006). Page 3 of 21 Jarocinska and Ruzik-Sierdzińska. IZA Journal of Labor Policy (2023) 13:02 Gordon and Varian (1988) show that a social security pension system could be a device to facilitate intergenerational risk sharing in a case when, e.g., one generation is young in times of economic depression, which translates also into lower incomes in old age. Blake (2006), referring also to Blinder (1981), points to the fact that pension schemes allow also for intragenerational risk sharing via redistribution within a generation. Pension systems may transfer from those who are lifetime rich to those who are lifetime poor [or with lower life expectancy (LE)], whereas tax or subsidy systems transfer from those who are temporarily rich to the temporarily poor. Studies on intragenerational redistribution show that various characteristics of pension systems have an impact on redistribution. Creedy et al. (1993) find that different mortality rates across industries and occupations negatively affect the progressivity of the UK pension formula. Aubert et al. (2013) show that an increase in the required insurance duration as a result of French pension reforms has a redistributive impact, but inequalities stemming from differential mortality seem to be less important. Part of the literature on intragenerational redistribution takes a longitudinal approach (e.g., Creedy et al., 1993; Karayel, 2006; Bonenkamp, 2009; Auerbach and Lee, 2011). It compares the balance between the total contributions paid and total benefits received, and confirms the regressive or progressive character of the pension system.4 For instance, Bonenkamp (2009) finds a sizable redistribution from males to females and from less educated to higher educated workers in the Dutch system of occupational pensions. Other studies use cross-sectional approach, i.e., they look at the way pension benefits affect the income distribution of the population of the elderly at a given period of time (e.g., Lefèbvre, 2007; Piirits and Vork, 2019). This approach stresses the extent to which public transfers reduce inequality and poverty at a given point in time. Lefèbvre (2007) finds a wide variation among the countries in the amount of intragenerational redistribution of public pension transfers. Piirits and Vork (2019) show that the introduction of a strong link between contributions and future benefits leads to a considerably higher inequality in pension incomes in Estonia. To our knowledge, this paper is the first to analyze the intragenerational redistribution of pension incomes of elderly Polish citizens based on micro data. Studying the Polish case is interesting because Poland underwent a major pension reform that transformed the public pension system into a Bismarckian, defined contribution scheme, which will have a considerable impact on future incomes of those covered by the reform. As societies age across the industrialized world, many other countries have also implemented similar reforms or are due to implement them in the near future, and therefore the distributional effects of the Polish reform may be of more general interest. Most of the existing studies predict future pension benefits for a hypothetical worker (e.g., OECD, 2013; Määttänen et al., 2014; European Commission, 2018) or for year cohorts, with the latter focusing on intergenerational differences (see Leifels et al., 2010; Jabłonowski and Müller, 2013; Égert, 2013). These studies find large drops in projected RRs, especially for people with career breaks and short careers, as well as low earners. By contrast, Lachowska and Myck (2018) predict pension benefits for households based on the micro data, but they do not study the distributional effects of pension reforms. They focus instead on the crowd-out effects of public pensions on private savings. Finally, a paper by Tyrowicz et al. (2018) quantifies the effects of the pension system reform on consumption and wealth 4 A system that pays the same amount of benefit to everyone is maximally progressive. Page 4 of 21 Jarocinska and Ruzik-Sierdzińska. IZA Journal of Labor Policy (2023) 13:02 inequality of the Polish future retirees in a general equilibrium framework. Our paper is different from Tyrowicz et al. (2018) in that we use other methods and data, and we also adopt a partial equilibrium approach. We show that the pension reform increases the inequality of future pension benefits, both in the upper and lower parts of the distribution. Had the pre-reform system continued unchanged, the Gini coefficient would not be >0.187, but after the reform the Gini coefficient ranges from 0.219 for men who were born in 1969, to 0.267 for the 1979 cohort. The Gini coefficient increases for the younger cohorts because of the gradual implementation of the reform. After reform pension benefits are adjusted with the so called “initial capital,” which accounts for accrued pension rights in the pre-reform system and is calculated on a pre-reform formula, its average share in the total pension benefit steadily decreases in our sample, from 38% for the oldest 1969 cohort, to only 1.5% for the youngest 1979 cohort. We further show to what extent the minimum pension guarantee mitigates the predicted increase in inequality, depending on the scenario. Under the current policy scenario, the minimum pension guarantee does not offset the increase in the Gini coefficient. However, under the high minimum pension scenario that follows the average level of minimum pension benefits in OECD countries, the minimum pension would more than offset the effect of the reform. The structure of the remainder of the paper is as follows. In Section 2, we provide a brief description of the Polish pension system. In Section 3, we describe the data and empirical methods used to project pension benefits and RRs for individuals in selected cohorts. Section4 describes the results, Section 5 analyzes the sensitivity of the results, and the last section concludes. 2 Overview of the Polish Pension System In this section we briefly describe the pension system for employees and the self-employed, which is managed by the Social Insurance Institution (ZUS) and its 1999 reform. There are three separate old-age pension schemes in Poland, of which the ZUS pension system is considered the largest, since it covers the majority of the working population and retirees, amounting to around 5.5 million old-age pensioners (GUS, 2018). The other two are the pension scheme for farmers and the pension schemes for the armed forces, judges, and prosecutors.5 Old-age benefits from the pension system represent an important source of income in elderly households in Poland. According to our estimates, based on the PHBS, in 2012, old-age pensions amounted to 63% of current income in households of retirees from the 1st quartile and 56% of income in households from the 4th quartile of income distribution. In the early 1990s, Poland had a relatively generous public pension system. However, common use of early retirement options, low fertility, and increased LE resulted in financial stress on the system (Lachowska and Myck, 2018). Early retirement was common because there were many incentives in the legislation to retire early and it was also an option for workers who were laid-off from their companies. Fertility rates dropped substantially, possibly in reaction to increased macroeconomic uncertainty and rising unemployment, especially for blue-collar workers and the less educated (Égert, 2013). The gradual modernization 5 In 2017, there were 918,000 old-age pensioners in the farmers’ scheme and 186,000 old-age pensioners in the armed forces scheme (GUS, 2018). Page 5 of 21 Jarocinska and Ruzik-Sierdzińska. IZA Journal of Labor Policy (2023) 13:02 of healthcare systems increased LE, albeit from low levels. As noted by Chłoń-Domińczak (2002), incremental changes to the pension system in the 1990s were not sufficient to ensure long-term financial stability, and a major reform was needed. The first proposal of a more radical pension reform was accepted by the government in 1995, followed by several years of negotiations among different stakeholders, and the new pension system was finally enacted on January 1, 1999. Table 1 summarizes the main differences between the old and the reformed pension systems for employees and the self-employed. In addition to mandatory pillars, it is possible to save voluntarily for retirement in occupational and individual pension plans. However, their role in old-age income provision is still marginal, mainly due to weak tax incentives and penalties for early withdrawal of savings. Pension benefits in the old pension system were calculated according to the following formula6: Pension benefit = Base amount × 0.24 + IB × (0.013 × CY + 0.007 × NCY), (1) where • Base amount is equal to the average economy-wide earnings net of social security contributions at the time of calculating the first pension; 6 Own presentation based on Act of December 17, 1998 on Old-Age and Disability Pensions from the Social Insurance Fund (with amendments). Table 1 Main features of Poland’s mandatory pension system before and after the 1999 reform Pre-reform Post-reform Type of system Pay-as-you-go defined benefit Pay-as-you-go, NDC plan (first pillar)+FDC plan (second pillar)* Benefit formula Flat rate plus a component based on earnings and tenure Depends on contributions paid on lifetime earnings and LE at the retirement age Transition from old to new system Cohorts born before 1949 – covered by the old system Cohorts born between 1949 and 1968 could choose to participate only in NDC or in both NDC and FDC pillars Cohorts born after 1969 fully covered by the new system FDC, funded defined contribution; LE, life expectancy; NDC, notionally defined contribution. *In 2013, a part of the contributions paid into the second pillar was moved to the first pillar and indexed by an average GDP growth from 5years before indexation. Furthermore, the reform of 2013 established that the first pillar, ZUS, will handle the pension funds retirement plans, with the accumulated funds transferred incrementally 10years before the statutory retirement age. Since 2014, the NDC scheme is the default option; the insured can opt-out to allocate part of their contributions to the FDC scheme. If the insured decides to pay their entire contributions to the NDC scheme, they will be indexed as pension capital in ZUS. Note: The information is according to the legal situation in December 2018. Source: OECD (2017), ZUS (2017), and own elaboration of authors. Page 6 of 21 Jarocinska and Ruzik-Sierdzińska. IZA Journal of Labor Policy (2023) 13:02 • IB (for individual base) – stands for the ratio of earnings from the 10 best years of work out of the last 20years before retirement to average earnings in the economy in the same years (additional restriction was IB ≤ 250%); • CY – number of contributory years; • NCY – number of non-contributory years, e.g., military service, studies, maternity leave (additional restriction NCY ≤ 1/3×CY). In the old system, there was also a minimum pension guarantee. If an accrued pension benefit was below the minimum pension and the eligibility criteria were met, the pension was increased to the minimum pension level. Additionally, there was a cap on pension benefits – the pension could not be higher than 2.5 times the base amount. There were no deductions for early retirement or bonuses to make people postpone retirement. The old Polish pension system provided relatively higher RRs for low earners and lower rates for high earners. The post-reform pension benefits depend on contributions paid on lifetime earnings and LE at retirement age. They are calculated according to the following formula: Pension benefit = Pension assets accumulated in 1st and 2nd pillars/LE (retirement age), (2) where LE (retirement age) is the unisex LE at the actual retirement age.7 While the post-reform pension system is more sustainable in the long run, this has been achieved through reductions in future pension adequacy. From a policy perspective, pension adequacy can be measured in RRs (i.e., comparing pension benefits to an individual’s last pre-retirement earnings) or in absolute amounts. A shift to the defined contribution formula results in smaller inequality in terms of RRs, given that the defined contribution formula is more linked to individual contributions, but a larger inequality in absolute pension amounts, because of a wider distribution of earnings as compared to pension benefits. For people who worked before 1999, ZUS estimated the so-called “initial capital,” which was added to contributions recorded in the new system in order to account for accrued pension rights in the previous system.8 The initial capital is a hypothetical old-age pension according to the pre-reform DB formula multiplied by the LE of a 62-year-old and by the adjustment factor, AF. The initial capital is computed as 0.24 × Base amount × AF × LE for a 62-year-old. For men, the adjustment factor AF has the following form: − = − 31 .1998 18 31 .1 998 * 65 18 25 ageon Dec tenureon Dec AF (3) It is to be noted that the impact of the initial capital on future pension benefits would vary depending on how long a person has worked before the reform. For instance, for people with a long tenure before 1999, their initial capital is relatively more important for the level of future pensions than the contributions paid since 1999. In other words, for older cohorts, the initial capital has a larger impact on pension benefits than for younger cohorts. Due to the redistributive part of the initial capital, i.e., the base amount from the old formula, one would expect that pensions of older cohorts would be more equally distributed compared to those of younger 7 Note that Poland implicitly uses a discount rate of zero because the calculation is based on life expectancy alone without any discounting. See Queisser and Whitehouse (2006) for a discussion of different discount rates in existing NDC schemes. 8 For details, see Chłoń-Domińczak (2002). Page 7 of 21 Jarocinska and Ruzik-Sierdzińska. IZA Journal of Labor Policy (2023) 13:02 cohorts. On the other hand, because of the stronger link between earnings and pension benefits in the reformed system, one would expect more inequality in RRs for older cohorts with relatively large initial capital and more equality in RRs for younger cohorts. Apart from the initial capital, there is no straightforward distribution in the reformed pension system. The only elements of redistribution are: (1) contributions paid by the state from general taxation revenues for specific periods of the working career (e.g., maternity and childcare leave, unemployment) and (2) the minimum pension guarantee that tops up the individual pension benefit for individuals with at least 20 (women) or 25 (men) contributory years. Thus, after the reform, the distribution of pension benefits will follow the distribution of earnings more closely than in the old system. To summarize, there are two major features of the Polish pension reform that would have an impact on the distribution of future pension benefits. First, pension benefits are calculated based on the more actuarially neutral defined contribution formula. Second, the post-reform formula contains a component – the initial capital – that is based on the pre-reform redistributive defined benefit formula, and its impact becomes smaller for younger cohorts. In addition to the initial capital, the redistribution in the new pension system is done through the minimum pension guarantee and contributions paid by the state from general taxation revenues for specific periods of the working career. 3 Data and Methods In this section, we describe the data we use, details of the sample selection, computation of lifetime earnings, and the assumptions and steps made when calculating future pension benefits. 3.1 Data The data comes from the PHBS run by the Polish Central Statistical Office. The PHBS is an annual representative survey which covers >37,000 Polish households and >105,000 individuals. The available data are from 2012. 3.2 Sample selection We only include individuals who receive earnings from temporary and permanent employment. This is because we need the information on earnings from employment in order to compute lifetime earnings. Other individuals receive income from other sources, e.g., pension benefits, disability pensions, and family allowances. We limit our sample to men because we can project their pension benefits with higher accuracy than women’s pension benefits. Women usually experience more career breaks due to family or care duties, which is especially true for Polish women. As we do not have information on career breaks in PHBS, calculation of non-contributory periods becomes difficult.9 On the other hand, men (at least, in Poland) rarely have periods of time out from employment because of family and care duties. 9 Piirits and Vork (2019) also focus on men only due to data limitations. Page 8 of 21 Jarocinska and Ruzik-Sierdzińska. IZA Journal of Labor Policy (2023) 13:02 We exclude individuals who work in agriculture and the armed forces. We do this because these occupations have special pension arrangements. Finally, we trim individual earnings below the 1st percentile and above the 99th percentile in order to reduce the influence of outliers and avoid the impact from coding errors. The resulted sample for earnings profiles consists of 15,940 male individuals. For the pension benefits calculation, we select males aged 33–43years in 2012, i.e., born between 1969 and 1979, consisting of 4,518 male individuals. Table 2 presents descriptive statistics for the estimation samples. Table 2 Sample descriptive statistics Sample 1 Sample 2 Variable Mean Minimum Maximum Mean Minimum Maximum Dependent variable Log monthly earnings 7.54 5.70 8.70 7.66 5.70 8.70 Characteristics of individuals Tenure 20.60 065 17.73 828 Educational attainment (%) Incomplete primary, primary and gymnasium 7.30 5.57 Basic vocational 39.71 40.83 Upper secondary general 7.24 5.90 Upper secondary vocational 24.82 24.12 Postsecondary non-tertiary 1.48 1.37 Tertiary 19.44 22.22 Occupation (%) Public servants and managers 4.22 5.18 Scientists and researchers 10.73 12.78 IT and technical personnel 8.34 9.29 Administration 5.29 5.09 Service workers 8.59 7.48 Manual workers and workers in construction 31.73 31.32 Other types of manual workers 21.29 22.23 Elementary occupations 9.10 6.64 Industry Mining 3.33 4.05 Manufacturing 29.14 30.46 Electric, gas and sanitary service 3.61 2.92 Construction 18.19 17.16 Trade 11.76 12.59 Transportation, communications, information 13.41 13.32 Finance, insurance, and real estate 2.37 2.39 Services 6.22 4.14 Public administration, education, and health 11.98 12.98 Sample size, observations 15,940 4,518 Note: Sample 1 is the estimation sample for earnings profiles; Sample 2 is the sample of working men born between 1969 and 1979 for pension benefits calculation. Page 15 of 21 Jarocinska and Ruzik-Sierdzińska. IZA Journal of Labor Policy (2023) 13:02 the impact of the minimum pension on the Gini coefficient of consumption. In the H minimum pension scenario, inequality measured by the Gini coefficient and the decile ratio p90/ p10 would be even lower in the new system than under the old pension system regulation. In the L minimum pension scenario, 18% of new retirees receive the minimum pension benefit in our sample, whereas in the H minimum pension scenario, this share rises to 42%. Finally, we analyze how other employment policies influence inequality of pension benefits. In particular, we study the impact of higher retirement age and of equalized employment rates among various groups of employees. First, we consider the higher retirement age scenario (see Table 6). Working longer until the age of 67years has almost no effect on the distribution of both pensions and decile ratios, but considerably increases average RRs for every cohort when compared to the baseline scenario. Second, we assume that employment probabilities are the same across education levels (no difference in employment rate scenario).18 The expected inequality in pension benefits decreases substantially for all cohorts (see Table 6). This is due to relatively longer contributory periods for less educated individuals than in the baseline scenario. Is increasing employment rates feasible for policymakers? As noted by Lindner and Morawski (2012), as a result of the pension reforms undertaken in 1999, the link between social security contributions and benefits tightens and so the incentives to work should increase. However, they found no evidence for increased labor supply as a result of the 1999 pension reform (Lindner and Morawski, 2012). A more recent paper by French et al. (2022) finds some, but rather small, employment responses to the 1999 reform. Contributing to this is the fact that labor supply is less responsive for those in their 30s than for those at older ages, and so the improved labor 18 We set the employment probabilities as equal to 92.9%, which is the average employment rate during 2005–2014 for men with tertiary education. See the discussion in Appendix. Table 6 Impact of higher retirement age and no difference in employment rate on pension benefits and RRs Cohorts Scenario 1969 1974 1979 Gini index of pension benefits Baseline – 65years, new system 0.219 0.239 0.267 Counterfactual – 65years, old system 0.178 0.182 0.187 Higher retirement age (67years) 0.221 0.241 0.268 No difference in employment rate 0.203 0.220 0.240 First pension benefits p90/p10 ratio Baseline – 65years, new system 2.72 3.03 3.27 Counterfactual – 65years, old system 2.21 2.28 2.21 Higher retirement age (67years) 2.76 3.01 3.28 No difference in employment rate 2.58 2.84 2.95 Average RRs (%) Baseline – 65years, new system 42 38 35 Counterfactual – 65years, old system 80 81 78 Higher retirement age (67years) 49 44 41 No difference in employment rate 47 43 40 RR, replacement rate. Page 16 of 21 Jarocinska and Ruzik-Sierdzińska. IZA Journal of Labor Policy (2023) 13:02 supply incentives at earlier ages due to the closer pension-contribution link yield less additional labor supply than that which is lost due to reduced work incentives later in the lifecycle. With regard to average RRs, both scenarios contribute to higher RRs when compared to the baseline scenario. These scenarios show similar increases in RRs as in the scenario with the high minimum pension guarantee, which confirms the robustness of our findings (see Tables5and 6). 5 Sensitivity of Results In this section, we check the sensitivity of our results to the underlying assumptions.19 In particular, we compare the distribution of predicted pension benefits and RRs in the baseline (after-reform) and counterfactual (pre-reform) scenarios to scenarios with a higher rate of return and a longer LE.20 All the sensitivity scenarios assume the after-reform DC pension benefits. The results are presented in Table 7. First, we examine the higher LE scenario. In particular, we assume an increase in LE at the age of 65years by 12months from the baseline of 252months for those retiring in the year 2034 (the cohort born in 1969), and 271months for those retiring in 2044. Higher LE results in a decrease in absolute benefits and RRs in the new system, but has no impact on pension inequality (see Table 7). Lower RRs as compared to the baseline are due to the lower level of first benefits in the defined contribution system. 19 In the long-run simulation models, assumptions can have a significant impact on the size of the effect studied (see, e.g., Bielecki et al., 2015). 20 A detailed explanation of the assumptions used in the calculations below is presented in Table A1 in Appendix. Table 7 Gini index of pension benefits, first pension benefits p90/p10 ratio, and average RRs for selected cohorts Cohorts Scenario 1969 1974 1979 Gini index of pension benefits Baseline – 65years, new system 0.219 0.239 0.267 Counterfactual – 65years, old system 0.178 0.182 0.187 Higher LE 0.219 0.239 0.267 Higher rate of return 0.216 0.236 0.264 First pension benefits p90/p10 ratio Baseline – 65years, new system 2.72 3.03 3.27 Counterfactual – 65years, old system 2.21 2.28 2.21 Higher LE 2.72 3.03 3.27 Higher rate of return 2.70 2.94 3.27 Average RRs (%) Baseline – 65years, new system 42 38 35 Counterfactual – 65years, old system 80 81 78 Higher LE 40 36 33 Higher rate of return 48 44 42 LE, life expectancy; RR, replacement rate. Page 17 of 21 Jarocinska and Ruzik-Sierdzińska. IZA Journal of Labor Policy (2023) 13:02 Next, we change the real rate of return in the funded defined contribution (FDC) and the real annual indexation of accumulated pension capital in the NDC from 2% to 3% (higher rate of return scenario). As we assume the same rate of return in the funded and unfunded parts of the Polish pension system throughout the paper (see Appendix for additional details), changes in the rate of return have an impact on the level of future pensions and RRs, but not on predicted inequality of pensions, as measured by the Gini index and the decile ratio p90/ p10 (see Table 7). To sum up, our main results on changes in intragenerational inequality are robust to assumptions on retirement age and the rate of return in the pension system. Also, these scenarios show similar increases in RRs as in the scenario with the high minimum pension guarantee, which confirms the robustness of our findings (see Tables 5 and 7). 6 Conclusions This paper has analyzed the intragenerational distributional effects of the 1999 Polish pension reform, based on micro data. We have studied the sample of men born between 1969 and 1979 (who will retire in the future according to the fully mature DC system) and predicted their pension benefits at the age of 65years according to pre-reform and post-reform rules. The main estimates in Table 3 suggest that the Gini coefficient of pension benefits steadily increases from 0.219 for the youngest cohort, to 0.267 for the oldest cohort in the reformed system. The increased inequality of pension benefits is driven by the change in the pension benefits formula, which is the result of the system gradually moving from a defined benefit to a defined contribution type. Our model shows that for younger generations, inequality increases both in the upper and lower parts of the distribution, which implies that relative poverty in Poland might increase as a result of the pension reform. We further show that the minimum pension guarantee would be able to mitigate the predicted increase in inequality. The minimum pension benefit reduces pension inequality in the reformed pension system, and the size of this reduction depends on the relative level of the minimum pension to average wage. However, it is important that people contribute to the system long enough in order to have the right to a minimum pension (Sawulski et al., 2019). Finally, our estimations show that an increase in retirement age in the Polish system would have similar effects on the adequacy of future benefits, measured by RRs, as the minimum pension guarantee. Increasing retirement age would be less costly for the public budget than providing a minimum pension benefit, but is arguably more politically challenging, as recent developments in reversing the reforms in Poland show. When interpreting our results, one has to remember that we simulate pension benefits only for a part of the population, focusing on men. We omit women, who usually have more career breaks and lower earnings, as well as miners and members of the armed services, who retire with more generous pension formulas. Another omitted group is farmers covered by a separate, less generous pension system.21 Adding these groups to the analysis would probably increase intra-generational inequality even more. Future challenges for pension systems (e.g., Carone et al., 2016) include the need for boosting retirement incomes by extending working lives and providing additional sources of 21 However, the share of employment in agriculture is decreasing in Poland. Page 18 of 21 Jarocinska and Ruzik-Sierdzińska. IZA Journal of Labor Policy (2023) 13:02 retirement incomes from voluntary savings. Our research confirms that longer work in the Polish pension system contributes to higher RRs, if retirement age increases, but also to lower inequality of pensions, if employment rates are similar for all educational groups. Our results suggest that policymakers should try to identify potentially vulnerable groups (i.e., those with low expected future pensions) in every cohort and implement policies that would allow individuals to accumulate enough pension capital to have an adequate pension income in the future. Declarations Availability of data and material The datasets supporting the conclusions of this article are included within its additional files. Competing interests The authors declare that they have no competing interests. Funding We gratefully acknowledge the financial support of the Mobilizing the Potential of Active Aging in Europe (MOPACT) Program of the EU Seventh Framework program (FP7-SSH-2012-1 grant agreement No. 320333). Authors’ contributions Both authors contributed to the analysis of the data and discussion of the results. Both authors read and approved the final manuscript. Acknowledgments We thank Agnieszka Chloń-Domińczak, Marek Góra, Marek Jarociński, Theo Nijman, Asghar Zaidi, and the audiences at 16th annual conference Warsaw International Economic Meeting 2021, “Asymmetries in Europe: causes, consequences, remedies” conference, CASE – Center for Social and Economic Research, EBS Universität für Wirtschaft und Recht, ESPAnet (European Network for Social Policy Analysis), MOPACT conference, Pensions Conference 2018 at Lodz University of Technology, and the Warsaw School of Economics seminars for their comments and suggestions. 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Pension benefit projections Additional assumptions for the baseline scenario include the following: • In the baseline scenario, we assume a 2% annual real average wage growth since 2018 (and higher in the section on sensitivity of results). This is in line with the productivity growth assumptions of the European Commission (see European Commission, 2018). • The rate of return and indexation of funds in the accumulation phase and the benefit formula are the same as in the current Polish pension system. As we do not know how many people decided to stop paying contributions to open pension funds, we assume that the real annual indexation of accumulated pension capital in the NDC pillar and the rate of return in the FDC are the same, and in the baseline scenario equal to 2%. For the years 1999–2017, we take the actual indexation.22 • For the calculation of contributions, we need information on individual earnings before 2012. Some men in our sample paid their contributions >25years. We assume that previous individual earnings change according to estimated age-earnings profiles. • Earnings in the PHBS are reported net of taxes and social security contributions. We gross up net earnings, and so they include taxes and social security contributions. We assume that personal income tax rates and social security contributions rates in the future will be the same as in 2012.23 • To take into account unemployment and other breaks in a professional career, we assume that every person is employed and pays his old-age pension contributions with a probability equal to the average employment rate during 2005–2014 for men with the same education level. During this period, average employment rates varied from 53.1% for the shortest education (i.e., category 1: incomplete primary, primary, and lower secondary education), through 79.1% for secondary education, to 92.9% for tertiary education. Thus, we account for the average expected employment by education in a business cycle, but disregard persistence in unemployment. We assume that employment for men is a period when pension contributions are paid. • We assume that every person in our sample starts working just after completing his formal education. For older cohorts that worked before 1999, we need to estimate the initial capital (see Section 2). We calculate the initial capital according to the formula discussed in Section 2. • Future unisex LE is calculated based on EUROPOP2010 projections of life expectancies at 65years or 67years (see Eurostat database). That results in 0.73% growth in LE at 67years every year starting from 201.1months for 2014. • For simplicity, we assume that people retire on January 1st of the year they turn 65years or 67years of age. 22 See ZUS website http://www.zus.pl/wskazniki-waloryzacji-rocznej, date of access 16 March 2018. 23 In Poland contributions are paid also on flat rate unemployment benefits, but <20% of the unemployed are entitled to such benefits. Other contributory periods are maternity leave and parental leave but those spells concern women. Page 21 of 21 Jarocinska and Ruzik-Sierdzińska. IZA Journal of Labor Policy (2023) 13:02 Table A1 Assumptions for sensitivity analysis – various scenarios Baseline: new system Counterfactual: old system New system, with higher (H) minimum pension New system, with lower (L) minimum pension New system, higher retirement age New system, higher LE New system, higher rate of return New system, same employment rates for all education groups Earnings not falling Employment rates (%) Higher education – 92.9, secondary education – 79.1, primary education and lower – 53.1 92.9 for all Retirement age (years) 65 67 65 LE at retirement (in months) at the year of retirement From 252 to 271 - From 252 to 271 From 236 to 254 LE from the baseline scenario + 12months (from 264months to 283months) From 252 to 271 Rate of return since 2018 (%) 2 - 2 3 Wage profiles Age-wage profiles rising until the age of maximum wage and then falling Age-wage profiles constant since the age of maximum wage LE, life expectancy.