Does defined contribution pension system “solve” the problem of population ageing? An analysis the distribution of future pensions using microsimulation model of the Polish DC pension system

Paweł A. Strzelecki, Warsaw School of Economics

In many developed countries the population ageing imposes a general change of the old-age pension system from pay-as-you-go (PAYG) system to the system based on the defined contribution (DC). The DC system moves the responsibility for the level of future old-age pensions from the state to individuals and strengthen links between individual benefits and the amount of capital accumulated during the working life. Despite this change, the state have still to guarantee the minimum income to prevent the destitution during the old age. Costs of such support could be considered as a measure of the influence of population ageing on the public budget under the DC pension system. The aim of this paper is to estimate how high these costs would be under the DC system in Poland. The adequate approach to that issue requires micro-level modelling of the life courses of individuals which accounts for the complex links between education, family career, employment and wages. At first, these relationships have been defined on the basis of models estimated on the data coming from the LFS in Poland. Next, these relationships have been used in the dynamic microsimulation model to calculate the distribution of future old-age pensions. The results of the model show that pension benefits of women will be much lower than those of men due to lower retirement age, labour force participation and wages. The low-skilled people are also at a disadvantage because of the unstable employment and lower wages. These groups of future retirees will be main beneficiaries of social policy aimed at income compensation. The successful policy of increasing labour force participation and employment of these vulnerable groups can result in decreases of government expenditures when members of these groups retire.