The Participation and Civic Engagement Team works to promote poverty reduction and sustainable development by empowering the poor to set their own priorities, control resources and influence the government, market and civil society institutions; and influencing governmental and private institutions to be responsive, inclusive, and accountable. Note No. 80 March 2003 Case Study 4 ­ Poland: Participation in Macroeconomic Policy Making and Reform Poland: Pension Reform payroll taxes) had already risen from 25% in 1981 to 45% in 1990. They could not easily be pushed Background up further. In January 1999, Poland launched a new pension The ongoing debate on pension reform quickly system that was the result of 5-6 years of broad spread from experts to policymakers as pension outreach campaigns and complex negotiations spending increased from 8.6% of GDP in 1990 to within the government and between the government 15.5% in 1994. Fiscal conservatives pushed and key stakeholder groups. A number of successfully to limit deficit spending. Through a compromises were made to broaden support for the series of ad hoc measures, policymakers began to reform; these changes will significantly increase chip away at pension benefits in an effort to close costs during the transition period but without the gap between contributions and benefits.1 This undermining the long-term viability of the reformed got the government through the immediate fiscal pension system. crisis but it provoked strong criticism from pensioners and unions and may have contributed to Post-communist Poland operated on a traditional the eventual collapse of the post-Solidarity pay-as-you-go (PAYG) system; payroll taxes of government in 1993. current workers financed the pension benefits of current retirees. Due to a number of policy changes expanding early retirement options and other privileges, pension costs skyrocketed in the mid- 1990s and Poland had one of the highest spending 1 Steps included reversal of benefits for special groups, rates of any post-communist transition country. In such as those undertaking hazardous jobs, under- addition, long-term demographic shifts led to a indexing so that benefits lagged behind rising prices, decline in people paying into the system relative to changes in tax treatment of pension benefits, changes in those receiving benefits. Contribution rates (i.e., the wage base for calculating pensions and a reduction in minimum guaranteed benefits. ___________________________________________________________________________________________________ This note was prepared by Madalene O'Donnell and Parmesh Shah of the Participation and Civic Engagement Group in The World Bank as a case study input on "Participation in Macroeconomic Policy Making and Reform" for the Action Learning Program on "Participatory approaches at the Macro level". Further details and documents related to this Action Learning Program are available at www.worldbank.org/participation The views expressed in this note are those of the author(s) and do not necessarily reflect the official policies of the World Bank. The new government, led by the Democratic Left The Ministry of Labor (MOL) wanted to modify Alliance (SLD), came into office promising "fair" and retain the current PAYG system. The Ministry benefits for pensioners but faced an even worse of Finance (MOF) wanted to convert to a situation. Constitutional Tribunal rulings had found predominantly funded system. Two civil society the ad hoc changes illegal and ordered the actors, the Solidarity movement and the Institute of government to restore lost benefits to pensioners. Labor and Social Policy, formulated proposals that These rulings promoted the view that the fell between these two poles. These received far government had effectively "defaulted" on its less attention but indicated involvement by actors obligations, undermining public confidence in the outside the government early in the policy reform system as a whole. Demographic trends continued process. The Institute also hosted an expert downward.2 By 1994, the proponents of conference to discuss the four proposals. comprehensive reform were gaining ground. Disagreements between the two ministries and Key Stakeholders: Pension Reform in Poland within the SLD effectively stalled reform for the - Alliance of the Democratic Left (SLD) government next eighteen months. The Minister of Labor, a 1993-97 (left-centrist) party heavyweight, initially had the upper hand and - Solidarity Electoral Action government 1997-present his proposal went out for public consultation in (right-centrist) May 1995. The MOF insisted that its proposal be - Trade unions, including "old" OPZZ and "new" - included by way of contrast. Polls indicated that Solidarity federations - Pensioners and workers nearing retirement (close to the public had doubts about the solvency of the 50% of eligible voters) current system, found the MOL's proposal too timid - Middle-aged and young workers paying into the and wanted more serious reform. In the autumn of system 1995, Parliament approved a broad program - Social Insurance Institution (ZUS) with 4,000/40,000 prepared by the Deputy Prime Minister and Finance employees Minister that included a mandatory funded pension. The MOL shifted to delaying tactics. Process In February 1996, following a cabinet reshuffling Building Consensus within the Government and appointment of a new Prime Minister, the reformers finally got a clear upper hand. Both the The new government began to assess its options. new Prime Minister and his new Labor Minister Several countries facing demographic pressures had now supported fundamental reform. switched from a PAYG system to a "funded system". Under a funded system, each generation Building Coalitions across Parties effectively pays for itself. Contributions accumulate and are invested on behalf of each The new Labor Minister, Andrzej Baczkowski, was worker by privately operated pension funds. The a skilled negotiator and, since 1994, had been amount of the pension varies with the performance chairman of the tripartite commission of of the fund but with a minimum return typically government, labor and business. He was a former guaranteed by the government or the fund. Funded Solidarity activist, and thus provided a bridge to a systems do not rely on intergenerational transfer key opposition force. He was named to the newly- and, in this way, address the demographics created post of Plenipotentiary for Pension Reform problem. But the shift from a PAYG system to a and a special Office for Pension Reform (OPR), led funded system imposes high transition costs; new by a Polish official from the World Bank, was workers no longer finance current retirees and the created outside the Ministry of Labor to lead government must step in to fill the gap. In many technical efforts.3 These two steps helped greatly cases, countries move to a "multi-pillar system" that to improve inter-agency coordination, signal combines a PAYG pillar with one or more funded government commitment, and draw in external pillars. expertise. 2One study estimated that, by 2050, the number of 3Both the World Bank and USAID helped to finance pensioners would double and the number of working-age activities of the Plenipotentiary and the Office for people would fall by one quarter. Pension Reform. Baczkowski built a team of experts and began involve them as partners would not succeed.4 working quietly on a significantly revised program Nonetheless, the SLD government effectively but calling it an update and expansion of the recognized this opportunity and built on it. previous proposal that was viewed as too conservative. In doing so, he incorporated two Managing Trade-offs in the Legislative Process elements of the Solidarity proposal, the addition of a funded pillar to the PAYG pillar and the use of Significant modifications were made to the original privatization funds to finance the pension system. "Security through Diversity" program following Meanwhile, in light of continued protests from consultations within the government and the pensioners, he worked effectively to pass legislation tripartite commission and before submission to changing the rules on indexing of pensions to Parliament. These concessions secured the critical address immediate concerns. support, on a general level, of trade unions and business associations but would make the transition The revised program, entitled "Security through more costly.5 Diversity", was completed in February 1997, three months after Baczkowski's sudden death. The As September 1997 elections neared, the SLD-led program called for a three-pillar system: a reformed government focused on passage of the least PAYG pillar (mandatory for workers over 50), a controversial elements of reform, meanwhile tying new funded pillar (mandatory for workers under Poland to a timeline that would force the next 30), and a third voluntary funded pillar for government to complete the legislative framework supplemental funded plans. Workers between 30 in 1998 and start implementation in 1999. Between and 50 could choose whether to participate in the June and August, laws were passed regulating the second pillar or only in the reformed first pillar. second and third pillars and approving the use of Under the new system, rules permitting early privatization funds to finance the transition. The retirement for special groups would be eliminated. second-pillar law provided for the establishment of a pension fund regulatory agency (UNFE) in May This proposal was carefully crafted to address the 1998 that would begin to license private pensions potential trouble spots for reform. First, it funds in August 1998. This law created a new set guaranteed existing benefits for pensioners and of powerful stakeholders, private pension providers, older workers, thereby greatly reducing their who would press for completion of reforms. These opposition to reform. Second, it gave the existing laws passed Parliament with the support of 90 Social Insurance Institution (ZUS) and its 40,000 percent of deputies across the political spectrum; employees a substantial, new role -- and stake -- in only a few right-wing deputies from the Christian the reformed system. national wing of the Solidarity movement voted against fundamental reform. Baczkowski's successor as Minister of Labor was, once again, a skeptic of reform but strong backing Momentum was lost during transition to a new from the Prime Minister kept the OPR-led process government. Tensions arose between the two moving forward up to the September 1997 coalition partners over the distribution of political elections. More importantly, the incoming posts. Meanwhile, specific groups began to Solidarity Electoral Action and Freedom Union mobilize against reform. The Solidarity government embraced the framework with government faced pressure from its own trade union relatively minor adjustments. base. The influential railway workers pressed to retain their separate pension system. The SLD, now This strategic understanding with Solidarity was in the opposition, could not turn its back on a essential and unique to Poland. Even the more process it had launched, but continued to include traditional OPZZ union endorsed the addition of a opponents of reform. secondary private pillar to the PAYG system. Trade unions are typically among the strongest 4Some countries exempt key unions (Mexico) or give opponents of pension reform, preferring a them responsibilities. Both the Solidarity and OPZZ traditional system of defined benefits rather than unions applied for licenses for private pension funds in one that links individual benefits to individual joint ventures with international firms. contributions. In most contexts, strategies to 5For example workers retiring by 2006 were "grandfathered" into the old system, exempting them from new rules restricting early retirement. some implementation deadlines were pushed back More importantly, the new government took the to April 1999. strategic decision to prepare an entirely new law regulating the first pillar, rather than amend existing Conducting Public Outreach provisions. This would allow them to combine a large number of laws and regulations into one text In May 1997, as Parliament considered the and fold separate groups, such as the uniformed "Security through Diversity" program, the Office forces, in the larger system. But it also opened a for Pension Reform (OPR) launched a public broad range of thorny issues for debate. The relations campaign that targeted policymakers, decision slowed down the deliberative process and political leaders, unions, employers, and the media. watered-down the reforms but, most agree, The campaign stressed the long-term insolvency of broadened support for the final product. the current system and the necessity of comprehensive reform. The Office conducted Fortunately, a new Plenipotentiary, Ewa Lewicka, public opinion surveys and widely publicized the provided strong leadership for the second phase of results, organized seminars, developed a reforms. A modified program was sent, once again, recognizable logo for the Office, held training to the tripartite commission in March 1998, programs for OPR and ZUS staff in resulting in significant revisions to government communications techniques and the principles of drafts. Trade union representatives pressed the proposed new system, maintained a website, successfully for retention of early retirement rules and produced thousands of brochures targeted to for miners but were unsuccessful in other areas. employers, unions and different age groups. The The OPZZ federation complained that it could not OPR put considerable effort into media relations, keep up with the rapid changes in the draft laws. arranging interviews with key architects of reform. Lewicka pressed unsuccessfully for adoption of a Members of the media joined Parliamentarians and uniform retirement age for men and women. There government officials on a study tour to four was no formal endorsement by the tripartite countries that had undertaken comparable reforms commission this time but unions did not mobilize and this greatly informed their reporting. against reform. Instead, they reached agreement with the government to subsequently resolve the Early press releases outlined experiences with thorny issue of privileges for certain occupations. pension reform in other countries and developments in the legislative process while later ones explained Additional consultations were held with the specifics of proposals adopted in Poland. government agencies, primarily the MOF and Ministry of National Defense, as well as the Launching the New System Catholic Church. Before the draft laws were sent to parliament, judges were excluded from the Revamping a national pension system is no small mandatory system on the advice of the Prime task but, to date, important steps have been taken: Minister's legislative department. Indexing of benefits, the size of pensions relative to wages, · In February 1999, the new pension fund income redistribution, elimination of privileges for regulatory agency (UNFE) began issuing specific occupations, exemptions of prosecutors and licenses to some 21 private pension funds some military personnel were all debated and registered over 300,000 sales agents; it intensively. Final passage was delayed when also worked hard to monitor their activities, miners occupied the Ministry of Labor for two days particularly advertising and sales practices; to demand that the government extend early retirement options for miners. Other strikes by · A massive public education campaign was OPZZ continued. Parliament finally completed developed to provide information to the consideration through a series of votes, some with a public ­ before advertising was permitted majority from the government coalition but others by private funds -- on the new choices with Freedom Union-SLD support. The over- facing many workers and the need to select arching Social Security law was passed in August a pension fund; 1998 and the first-pillar law was approved in December 1998. Because of delays in passage, · By the deadline of December 1999, most of the 11 million workers between 30 and 50 years of age had selected a pension fund and, where necessary, make mid-course corrections. and workers and employers had contributed Initial results were disappointing. People could the first $13 billion in assets. recall slogans but did not understand what they meant. Focus groups indicated that the key sources The performance of ZUS was a disappointment of information for people were conversations with during this period. Its local offices were friends, press articles and, literature produced by overwhelmed by customers eager to get information private pension funds. ZUS was a last resort and about the new system. Its central offices struggled associated with old system. to modernize the information technology system and train its workforce. As a result, there was a The office of the Plenipotentiary was officially several-month delay in tracking individual dissolved in April 1999 but some of its employees contributions and passing them on to private continued work from within the Ministry of Labor. pension plans, as required by law. Focusing on opinion leaders to educate key publics, Lewicka traveled to eight of the largest cities It is far too early to draw conclusions about system outside Warsaw in May and June 1999. She met performance and certain issues, such as bridging with employers, trade union representatives and pension schemes and creation of an office for local media. A new communications strategy, supervision of long-term actuarial aspects, remain adopted in August, developed new television spots to be clarified. But a policy framework has been and added radio. Newspaper advertisements put in place that sets the conditions for improved answered the most common questions identified by management and operation of the pension system focus group participants and cautioned the public over the long term. about possible excessive claims by private funds. The Second Public Outreach Campaign Additional focus groups indicated that people . realized that pension funds were providing By the end of 1998, continued polling indicated subjective and general information and that clearly the need to shift from opinion-leaders to the information from the Office of the Plenipotentiary general public. Only 30 per cent of people was considered more reliable than ZUS. People surveyed said they had heard of the pension reform had four key questions: and understood the changes proposed. Some 55 per · Are pension funds reliable? cent had heard of a reform but didn't know the · What are the differences between them? specifics. Some 83 per cent felt they were not · How should people decide between sufficiently well informed and 77 per cent said they splitting the pension contribution or staying would like to learn more. in the public scheme? · What are government guarantees of pension In March 1999, as mentioned above, a second, fund performance and benefits? broader campaign launched with objective of explaining the new system and the different options Public education efforts continue and the UNFE open to different age groups. Conflicting also ran a limited information campaign and held information was put out by various pension funds visitor hours in its offices. Officials appeared on with massively larger advertising budgets ($100 radio and TV programs and joined debates and million compared to $5 million spent by the conferences, mostly aimed at supporting employers government). Software for estimated pension and unions in setting up voluntary "third pillar" benefits could be downloaded from the OPR schemes. Rather than producing easy-to-use website. A call center was created which handled explanatory tables, the UNFE proposed new cost 200,000 inquiries from March-December 1999; structures that created new confusion. But, as press, television spots and brochures promoted the noted, they played a very constructive role in call center and the new ZUS; four televised spots monitoring the advertising and sales blitz conducted reached an estimated 96 percent of urban adults; by private pension funds in 1999. booklets were included with monthly telephone bills. Conclusions With outside consultants, the OPR used focus Special offices created early in the process were groups to track the effectiveness of outreach efforts very important in coordinating reform and signaling high-level commitment. The Prime Reduce the demographic risk to the financing of the Minister recognized the need for a Plenipotentiary system by shifting from defined benefits to defined to devote intensive resources to reform without contributions (i.e., a funded system); having the day-to-day management of the pension Strengthen the linkage between contributions and system. The plenipotentiaries, in turn, led public benefits; campaigns and successfully shielded the Office for Insulate benefits from ad hoc manipulation by Pension Reform from political fights, enabling it to reducing the role of the annual budget process; focus on professional tasks. When necessary to Steadily reduce contribution rates over time from sustain reform, key cabinet appointments were high level imposed in the mid-1990s; made. Reduce required budget subsidies over time; Reduce incentives for early retirement that The government built support outside its own previously applied to approximately 24 percent of governing coalition that was essential for the workforce. sustaining reforms. This was particularly important in light of changes in government. The support of Not only the government but trade unions and other opposition deputies was essential to approval of key organizations faced difficult trade-offs. The loss of aspects of the first-pillar law. early retirement options and other occupational privileges and a decline in the level of pensions The government effectively reached out to trade from 1994 levels is a difficult blow. But there was unions and business associations before finalizing an assessment that the relatively exceptional legislation for Parliament. Cooperation from trade circumstances in the mid-1990s were not unions was clearly an essential element of sustainable over the long-term and the trade unions achieving reforms in Poland. The thrust of the are now a full partner in the new system. "Security through Diversity" program was consistently supported by the Solidarity movement The long-term prospects of the new system appear and the OPZZ and both were intimately involved in good. Benefits paid under the first pillar are linked consultations, along with business associations. to wage growth and benefits paid under the second The tripartite commission was used effectively by pillar are linked to the rate of return on pension both governments to vet proposals, hash out fund investments, thereby diversifying risks for the compromises and, where possible, reach agreement. system as a whole. Nonetheless, individuals face uncertainties about the size of benefits and the The broad consensus carefully constructed during government faces uncertainties related to the the reform process slowed the pace and content of economy, political factors, such as changes in reform but contributed significantly to benefits or indexation, and performance and implementation. Trade unions, brought in as efficiency of the private pension funds which must partners during the coalition-building, as playing a ultimately be guaranteed by the government. key role during implementation; they are directly involved in both the second and third pillars. The New stakeholders created during the reform will Catholic Church, also consulted during the reform play an increasingly important role. "The pension process, has a 20 percent ownership of a pension funds will be the most powerful financial fund and an estimated one-fifth of its priests have institutions in the country," according to one church helped to attract clients. official in Poland. It is essential that reformers set up the appropriate regulatory mechanisms not only Important concessions made to build support will to treat existing stakeholders but future ones as significantly increase transition costs but do not well. undercut the essential objectives of the reform. Adjustments in retirement age, exclusion of The decision to expand the role of ZUS has created selected groups, retention of some early retirement difficulties in implementation. ZUS was given privileges and "grandfathering" of current rules expanded responsibilities and has not moved until 2006 will cause the pension system to operate quickly enough to meet them. Public confidence in in a deficit for an additional seven years. But it will the agency remains low. Its highly decentralized eventually achieve its original objectives: structure has to be significantly revamped and its staff upgraded. It needs to develop a new system capable of tracking the individual accounts of all retirees, including actual balances in the second The Democratic Left Alliance government opted to pillar and "notional" or estimated accounts in the retain the initiative, keep momentum building, and PAYG pillar. correct mistakes later. The Solidarity Electoral Alliance and Freedom Union government opted to In general, public outreach and communications work through a full drafting of legislation in the efforts were effective. The Plenipotentiary was viewed as a credible source of information by a public that was quite savvy about evaluating information. The government made very good use of public opinion polls and focus groups to: demonstrate public support for reform; Parliament, moving at a painstaking pace and design a program likely to garner support; slowly resolving all issues. Despite these identify controversial elements; and differences, both governments combined technical guide public education programs and provide timely expertise with a strong commitment to consultation feedback about their effectiveness. and coalition-building that is striking. Civil society actors, despite the highly technical issues involved, Opinion polls taken at this time indicated that the were full participants and contributed significantly proportion of people who felt their information was to the final product. A large portion of the public adequate or improved had increased from less than feels that information on the reforms has been made half in late 1998 to nearly 80 per cent. Just 16 per easily accessible. These are important cent said they felt they lacked information, achievements in an operating environment of crisis compared to nearly half earlier. Approximately 50 management, limited resources, and competing percent of respondents thought information was priorities. easy to find and, by March 2000, this proportion had risen to 70 percent. Key References The second public information campaign faced the Sarah Brooks and Estelle James, The Political difficult task of explaining the new system. Polling Economic of Pension Reform, paper presented to suggests that important progress was made but there the World Bank conference on New Ideas About are grounds for concern. Some 91 percent were Old Age Security, September 14-15, 1999, aware of the government campaign but only one- Washington, DC. third assessed it positively and forty percent were critical and felt that information was not conveyed Agnieszka Chlon, Pension Reform and Public clearly enough. Much of public knowledge remains Information in Poland, World Bank Pensions limited to slogans and basic questions remain Reform Primer,Washington, DC: The World Bank, unanswered. 1999. The media played a key role throughout the reform Agnieszka Chlon, Marek Gora and Michal process and one of the most effective investments of Rutkowski, Shaping Pension Reform in Poland: government resources was in media outreach and Security through Diversity, World Bank Pensions education. Focus groups consistently identified the Reform Primer, Washington, DC: The World Bank, media as an important source of information. The 1999. bulk of stories covering pension reform were not opinion pieces but informational articles explaining Mitchell A. Orenstein, How Politics and Institutions various aspects of pension reform and their Affect Pension Reform in Three Postcommunist implications. When, in early 1999, press coverage Countries, World Bank Policy Research Working of government social programs turned negative, Paper, March 2000. pension reform continued to be cited as the exception and was considered relatively well Jo Wrighton, "The Pension Peddlers of Poland," prepared. Institutional Investor, December 1, 1999. Final Remark "Social Development Notes" are published informally by the Social Development Family in the Environmentally and Socially Sustainable Development Network of the World Bank. For additional copies, contact Social Development Publications, World Bank, 1818 H Street, NW, MSN MC5-507, Washington, DC 20433, USA, Fax: 202-522-3247, E-mail: sdpublications@worldbank.org. Printed on Recycled Paper