Raising the retirement age is unavoidable: Report from the 167th mBank-CASE Seminar

The subject of the 167th mBank-CASE Seminar (held on October 29, 2020) was the influence of the retirement age and the shape of the pension system on the current and future situation of the Polish labor market, economic growth and public finances. An introduction to the discussion was provided by Dr. hab. Agnieszka Chłoń-Domińczak, a professor of the Warsaw School of Economics, after which three experts took the floor: Dr. Michał Rutkowski (World Bank), Professor Joanna Tyrowicz (University of Warsaw) and Professor Filip Chybalski (Lodz University of Technology).

Watch a recording of the seminar (in Polish)

Professor Agnieszka Chłoń-Domińczak started her presentation by stating an important dependence: the statutory retirement age, but most of all the actual age of transitioning to retirement, has a significant effect on the labor market and the economy. She also noted that in many developed countries, including Poland, the retirement age has become a tool for social policy and the labor market. One manifestation of this is the different retirement ages for women and men, and the popularization of early retirement treated as a way of reducing demand for labor. Next, she showed how the statutory and actual retirement ages have changed over the past 30 years. She stressed that until 2008 (when the right to early retirement was restricted), the actual retirement age was a few years younger than the statutory age, beginning to grow significantly only after 2008, today reaching the statutory level. After a political decision to return to the age of 60 and 65 for women and men respectively, it is difficult to expect an increase in the statutory retirement age in the next few years.

At the same time, more than half of Poles aged 50 and older say they want to retire as soon as possible. Abandoning the process of increasing and equalizing the retirement age for women and men will mean that in 2050 Poland will most likely be the country in the EU with the lowest statutory retirement age. In other countries this age either is already higher than in Poland, or will be raised. Thus, Poland will be further and further behind. If the statutory retirement age is kept at the current level, by 2070 Poland’s workforce will shrink by 35%, while the demographic burden indicator will grow from today’s 30% to about 80%. This situation could be corrected to a certain degree by increasing the retirement age to 67, but even then the demographic burden will grow to 60%. The speaker stressed that eliminating entitlements to early retirement led to significant growth in labor force participation by women close to retirement age, which translated into significant growth in their pension capital. Nevertheless, if the current statutory retirement age for women is maintained, they’ll receive pensions that are about 40% lower than men’s, while if the age is raised to 65 it would limit this gap to about 8%.

Dr. Michał Rutkowski stated that the heart of the problem that the creators and reformers of a retirement system have to deal with is the so-called retirement triangle dilemma. It consists in the impossibility of simultaneously achieving three goals: the system must be adequate, it must be stable, and the retirement age must meet people’s expectations. For example, achieving the first two goals, meaning an appropriate level of pensions without harm to public finances, requires that people retire much later than society expects. In turn, if the system is adequate and stable/sustainable, it has an unrealistically high retirement age. The speaker stated that his more than a decade of observing reforms of pension systems in various countries incline him to certain conclusions. First, a system in which the real purchasing power of pensions grows, but simultaneously the replacement rate is declining, could be deemed inadequate. Secondly, the retirement system should be stable not only in the economic sense, but also in the political one. That means the majority of society should want the system to remain the way it is. Third, to raise the actual retirement age, financial incentives in the form of growth in benefits for each year of work after achieving the minimum retirement age are not enough. Most people behave shortsightedly, and retire immediately after reaching the minimum age, so a significant extension of labor force participation by people close to retirement age, without raising the minimum age, doesn’t seem possible.

Professor Joanna Tyrowicz began her presentation by stating that the Polish pension system was supposed to be balanced, but in reality it’s not. That results primarily from the need to supplement minimum pensions, which would have cost the state budget 1.5% of annual GDP, but after the reduction of the retirement age in 2017 is now costing as much as 4.5%. The models prepared by her team indicate that in the scenario of maintaining the current statutory retirement age (60 and 65 years respectively), the percentage of people receiving the minimum pension will grow over the next 40 years from the current 40% to 70%, and then will remain at this level for the following 30 years. However, if the retirement age were increased to 67 years for both sexes, this percentage wouldn’t increase. Thus, maintaining the current retirement age will have a negative effect on the budget, and as a result, also on GDP. From the point of view of beneficiaries, the most harm will come to the highest-earning women, because their pensions will be about 30-40% lower than what they would receive if they worked until age 67. The negative effects for men will be much lower: the top earners’ benefits will be 7-12% lower. This means that today it seems crucial to increase the retirement age for women to 65, while raising it further to 67 is less significant.

Professor Filip Chybalski started his presentation by focusing on the question of the relationship between the effective retirement age and the adequacy of the pension system. He said that of course this dependence is fundamentally positive, but his international research indicates that in pension systems where the state plays a bigger role, the effective retirement age is lower, which has a negative effect on the system’s stability. He also presented the results of his own research carried out on a macropanel of 21 European countries in 2008-2014. It leads to three fundamental conclusions. First, the statutory retirement age is significant, as it has a fundamental influence on differences in employment rates in the population aged 55-64. This may be because it affects people’s expectations, thus encouraging them to invest in their qualifications, in this way giving them a basis for longer labor force participation. Secondly, low participation by people close to retirement age coincides with worse health. This suggests subsidies would be in order for actions to encourage healthy behavior. Third, the breakdown of the population by profession to a large degree explains the volatility in the actual retirement age internationally. This in turn suggests the conclusion that a policy promoting longer labor force participation should be targeted at specific professions of professional groups. Summing up, Professor Chybalski stated that it’s necessary to raise the retirement age: to ensure the adequacy of benefits over the long term, it’s essential to maintain the system’s financial stability. As a result, it’s necessary to send a clear signal to society that since we’re living longer, we also have to work longer.

After the panelists spoke, Professor Marek Góra (Warsaw School of Economics) asked to respond. He began by stating that while it’s certainly true that we can’t precisely predict what will happen several decades from now, one thing is certain: after about 30 years the retirement age will be much higher than it is today. The current retirement age is in fact being used as a political weapon, which is why it’s being reduced, but this won’t be possible over the next few decades. So the retirement age will definitely be higher, and we need to prepare for this. In this context, two basic attributes of the Polish pension system, which distinguish it from those of other countries, are significant. First, in the Polish system we don’t have a classic retirement age, but a minimum age, which serves only a social function, not a fiscal one. The minimum age is set in order to protect people from mistaken decisions, which could have negative social effects. Second, the level of the minimum pension isn’t guaranteed in any way, unlike in the old system, so it is subject to changing regulations. In the future, minimum pensions will be determined by the bargaining power of the younger generation vis-a-vis the old, and by the state of the budget. Professor Góra stressed that we need to start informing young people already today that in the future they’ll work much longer than their parents do. They have to know this now, so that they can prepare for it, e.g. investing in maintaining their health over the long term and in the adaptability of their professional qualifications. In this context the latest reduction in the statutory retirement age (the return to the earlier levels) caused great harm to people, because it gave them the false impression that they don’t have to prepare to work longer in the future.

The final part of the seminar was devoted to answering questions from the audience.

Written by: Dr. Jacek Liwiński