Why on average is not enough? - The microsimulation projection of the pension distribution in Poland

Pawel Strzelecki, Warsaw School of Economics

This paper presents the results of the basic microsimulation model formulated to project the life cycles of persons by cohorts which account for labour market participation, education and earnings. Next, the aggregated “cohort biographies” are combined with the population projection, prepared separately. The model is applied to project the distribution of future pensions in Poland. According to the pension system implemented in 1999, persons born after 1968 are in the defined contribution scheme. Their future pensions depend entirely on their funds collected from mandatory contributions on two accounts: in the public institution and in the private pension fund. The total fund collected will depend on the work life course (wages and employment record). The results illustrate the microsimulation based projections of the pension distribution in comparison to traditional techniques which allow for pension projections either in terms of averages or different variants. The projected pension distribution based on the microsimulation model shows that correlation between unemployment, lower education and lower earnings could lead to very low pension levels of the significant part of the retired population. That interrelationship is hardly to be demonstrated when using the traditional techniques. The presentation of preliminary results is followed by conclusions about a possible influence of the DC pension system on the labour force participation in Poland. The first section of the paper presents the microsimulation model. Next, the projected pension distribution is described. In the subsequent part these results are compared with the results based on calculations which refer to the average replacement rate and simulations in which only some variants of “average” persons are included. Conclusions about effects of the DC pension scheme on the labour market include also an attempt to evaluate challenges for the to social policy which result from the regulation about a necessity to pay minimal pensions.