Social Protection in Poland

Transcription

1 Social Protection in Poland Katarzyna Piętka, CASE Center for Social and Economic Research Background Paper Prepared for the EU8 Social Inclusion Study January 22, 2007

2 Introduction The evolution of the social protection system in Poland is driven by several factors. The most important reason for the change was the economic transition that brought about the shift to the market-driven economy. The transition led to improved economic performance of the country, but also to increased differences between various groups of people. In particular, the problem of unemployment, officially non-existing up to then, became a significant issue after Structural changes to the labour market, significant shifts in labour demand structure led to rising unemployment that quickly reached two-digit levels. The beginning of the new century and the accession to the EU also had an impact on the policy development. In particular, Poland joined the process of the open method of coordination in the field of social inclusion. It embraced the common objectives for social inclusion and started to prepare strategic documents aimed at reducing exclusion and increasing inclusion. Background information Transition Starting with Big Bang of Balcerowicz s plan Polish economy has been changing since 1990 due to the end of the centrally planned system and shift to the free market economy. After the initial drop in GDP (by 11.6% in 1990 and further 7% in 1991) Polish economy started to gain momentum within new structures. It recorded high growth rates (on average by 6.2% between ) which decelerated to over 4% by the end of the 90. Russian crisis but most of all luck of structural reforms put Polish economy onto the very slow development path at the beginning of the decade (over 1% growth in ). Heavy restructuring of enterprises let gaining competitiveness and made the net exports a driving force of growth until EU membership has offered new opportunities and good financial situation in companies started to impact on growth in employment and wages as well as investments to build up potential for the future. However, since 1998 until 2005 we have observed jobless growth. Such a huge systemic change influenced also social policy which especially at the beginning of transformation served as a tool for smoothing pain of layoffs from the privatised or bankrupting/restructuring companies. Policies at that time were designed to absorb the excess labour force through various types of social protection schemes. As a result, in early 1990s, the pension system was treated as a buffer to absorb the effects of labour market restructuring. Redundant workers used early retirement and disability as a more convenient route for inactivation. In the field of social policy, significant changes were also observed in family benefits and social welfare benefit schemes. Family benefits were decoupled from the employment status, mainly due to rising unemployment and the need to support those families that had adults without a job. Some benefits were expanded for multiple child families. Additionally, the new class of social assistance benefits was introduced to address poverty. Responsibility for some of the policies was shifted onto local government. On the other hand, social spending was decreased by converting universal benefits into means-tested ones, limiting the benefit increases and tightening eligibility through defining new social minimum (see: Balcerzak-Paradowska et al, 2003). As a result, the family benefits expenditure fell from 2.3 per cent of GDP in 1991 to 1.06 per cent of GDP in 1998 (Hagemejer, Liwiński, Wóycicka, 2002). 2

3 The administrative reform and shifting responsibility for family and social assistance policies to local administration, combined with general need to reduce expenditure also led to reduction in institutional care services provided to families. For example, the share of children covered by pre-school education decreased, as local governments faced significant financial problems. Between 1990 and 1998 the number of pre-schools dropped by nearly a third (see: Balcerzak-Paradowska et al. 2003). Introduction of broader means-testing led to increased administrative burden of servicing the social assistance benefits. At a turn of the century, almost the sole activity of local social assistance offices was payment of various types of benefits, leading to reduced capacity to perform social work and actively support their clients in social integration. However, it is difficult to assess the actual impact of broader introduction of means-testing on the administrative expenditure no one conducts such estimates. In the second half of the 1990s, general public finance situation, combined with rising pension expenditure led to gradual reduction of other social expenditure as well as subjecting them to income-testing and other than income criteria. This was particularly visible in the case of family benefits, but also in social assistance. In the mid of 1990s the labour market situation improved slightly, but from 1998 the unemployment started to rise again, causing also an increase in poverty and widening risk of social exclusion, at that time, accompanied also with very high tax wedge, that was one of the reasons of falling labour demand. The first wave of changes in social policy aimed mainly at lowering overall costs was followed by changes introduced in late 1990s as well as at the beginning of the current decade. The most important include: - changes in the disability pension system, legislated in 1997 and introduced in 1998; they concerned mainly changing the definition of disability from medical (poor health) to the loss of working capability and changing the procedure of disability assessment; - old-age pension reform of 1999 (with transitory period); it changed the pension system from the defined-benefit to the defined-contribution one and linked more closely contributions paid into the system with benefits received, - health-care system reform of 1999, - the sickness system reform of 1999, - reform of administrative and governance structure, shifting social services (from 1999) and unemployment services (from 2000) to local government, which to some extent was followed by decentralisation of funding for these purposes, - family benefit reform implemented in 2004 (since 1 st May 2004), - social assistance policy reform implemented in Those changes led to some reduction in the number of beneficiaries and expenditure in the case of sickness and disability programmes. EU accession The enlargement of the EU had a significant impact on formulating the objectives of the social integration policy in the new member states, including Poland. The objectives of the social inclusion policy in Poland derive also from the goals connected with fighting poverty and social exclusion adopted by the European Council meeting in Nice in December

4 Poland considered them as fully justifiable and has officially confirmed this by adopting the Joint Inclusion Memorandum (JIM) of Poland and EU in In June 2004, Polish government adopted the National Social Inclusion Strategy (NSIS). This document was prepared in an innovative way. The Task Force, which prepared it, consisted of representatives of social partners: non-governmental organisations, central and local governments, and international organisations. The NSIS formulated 20 goals in five areas of social integration policy. Box 1. Goals of the Polish National Social Inclusion Strategy for the period In education: - Increasing the number of children participating in pre-school education, - Improving the quality of education at the level of lower and higher secondary schools, - Promoting tertiary education and adjusting it to the demands of the labor market, - Compensating deficits in children s intellectual and physical development. In creating social safety networks: - Radically reducing extreme poverty, the level of which is unacceptable today and demands instant, decisive steps, - Reducing the tendency for the income inequality growth so that the differences do not exceed the average level of the EU countries. In labour market policies: - Limiting the long-term unemployment; - Limiting unemployment among the youth; - Increasing the level of employment among the disabled; - Increasing the number of participants in the active labour market policy (ALMP); - Promoting life-long learning. In health care: - Extending the average healthy life expectancy; - Promoting health insurance; - Covering more women and children with national health programmes; In access to rights, goods, and services: - Increasing access to housing for groups most threatened with homelessness; - Ensuring better access to social workers; - Developing community aid and increasing the number of people covered by it; - Increasing citizens involvement in social activeness; - Implementation of the National Social Inclusion Strategy by local governments; - Increasing access to civic information and counseling. Source: MSP (2004a) The preparation of NSIS was also accompanied by the development of the National Action Plan for Social Inclusion (NAP/Inclusion) for the period NAP/Inclusions for all 10 new EU member states were prepared and presented under the open method of coordination programme. The NAP/Inclusion is a programme improving access to social rights and increasing the scope of their implementation. The objectives in the NAP/Inclusion included (see: MSP, 2004b): - Taking up educational, social, and health activities preventing exclusion as well as setting the scene for equal chances for children and the youth; - Creating social safety networks and prevent from poverty and social exclusion; - Implementing the right to work for everyone, especially for the groups who are in the most difficult situation on the labour market through appropriate macroeconomic policies and employment policy, 4

5 - Developing the institutional system with a clear division of responsibilities of the central and local governments, at the same time opening the scope for the civic action as well as for making the users the subject (not object) of social services provided both by the state and the non-governmental organisations; - Involving the citizens in social activity, mainly through increasing their participation in the activities of non-governmental organisations and other forms of social work and grassroots initiatives; - Increasing the number of local governments which create local strategies for fighting poverty and social exclusion and then consistently implement them with sensitivity and full involvement. Demography and population structures Polish society is fairly young. The age of 22% of population is below 18 (2003), then 40% is in productive age (18-44) and 23% in post-productive age (45-59/64); people in legal retirement age (+60/65) account for 15%. Compared with 1989, however, the society got older : at that time the young (below 18) were accounting for 30%, whilst people at postproductive age only 17%; people at retirement age 13%. 38% of society lives in the rural areas. Across the age groups we have relatively more children (44% out of all below 18) and less post-productive people (33%) living there as oppose to the cities (for other age groups the structure is close to the average, i.e. 38%). In Poland we have to deal with phenomena of rural poverty: all the poverty indices (absolute or relative) are more than twice higher in the countryside than in the cities. It reflects low profitability of farming which is dominated by small farms, very often providing only substance living. Agriculture is still a buffer of hidden unemployment in Poland. Productivity of labour in agriculture is very low farmers account for 16% of working population, however, value added in agriculture only for 4.3%. EU membership brought some improvement in the financial situation in the countryside. EU direct payments (within CAP) as well as huge demand for Polish agriculture products in enlarged EU created big financial streams for farmers. According to household budget surveys the real disposable incomes in farming households increased by 8% in real terms in 2004 (compared with 2.2% for selfemployed and drops for others) and further 10% in 2005 (compared with 2.4% for selfemployed and smaller increases for others). Labour market Polish labour market can be characterised by low activity and employment rates and high unemployment (Table 1). According to LFS data active population aged accounts only for 64.4 per cent of all persons in these age brackets. Low participation rate could be observed especially for older people (an effect of previous pension and labour market policies) and for the disabled. 5

6 Table 1: Basic Labor market data Total population (thousand) population population Active population (E + U) employed (E) unemployed (U) out of the labour force (D+R+O) out of the LF due to disability (D) out of the LF due to retirement (R) n.a. n.a. n.a other (O) participation rate 1 (4/1 x 100) 43.2% 43.3% 44,2% 44,5% 44.1% 43.7% 12 participation rate 2 (4/2 x 100) 55.7% 55.3% 55.3% 55.1% 54.3% 53.8% 13 participation rate 3 (4/3 x 100) 66.1% 65.7% 65.8% 65.7% 64.8% 64.4% 14 activity rate 1 (5/1 x 100) 38.5% 37.2% 37,0% 36,2% 35.2% 35.0% 15 activity rate 2 (5/2 x 100) 49.7% 47.5% 46.3% 44.9% 43.3% 43.1% 16 activity rate 3 (5/3 x 100) 59.0% 56.4% 55.0% 53.5% 51.7% 51.5% 17 unemployment rate (6/4 x 100) 10.8% 14.2% 16.4% 18.6% 20.3% 20.0% 18 non-activity rate 1 (7/1 x 100) 22.1% 22.6% 23,0% 23,2% 24.0% 24.2% 19 non-activity rate 2 (7/2 x 100) 28.5% 28.9% 28.8% 28.8% 29.5% 29.8% 20 disability rate (8/2 x 100) 7.4% 7.6% 7.1% 6.7% 6.7% 6.5% 21 dependency rate (7/4 x 100) 51.2% 52.1% 52.1% 52.3% 54.3% 55.4% 1 End of year, Central Statistical Office estimations. 2 Data 2-10 average yearly Labor Force Survey data. 3 For years retired are counted as other. Note: No LFS in 2 nd and 3 rd quarters 1999 because of change of the method of observation, since 2001 change of methodology; 2) According to your requirements disability rate (row 20) is calculated as a ratio of population aged non-active due to disability to population aged 15+. SO that is not disability rate as reported in other statistical sources. It does not include neither working disabled nor persons aged 65+ with certification of disability. Source: Polish Labour Force Survey Due to the constant increase in the unemployment rate in years in the whole analysed period employment rate was decreasing to the lowest level among all EU-25 countries. Number of persons aged increased in this time by over 0.7 mln but the number of the employed among them decreased by 1.5 mln in the same time. Since 2004, the slow improvement in the labour market situation can be observed. High unemployment and high long-term unemployment (half of the registered unemployed population) make successful activation of the unemployed especially difficult. Also, such a situation has an impact on the relative level and composition of households income. Input social protection system Structure of expenditures Social expenditure trends between 1998 and 2003 are to a large extent a consequence of policy changes that were implemented in the course of the 1990s and do not capture effects of 6

7 reforms introduced in 2004, that will have some impact on family and social assistance expenditure. Table 2. Overview social protection expenditures as percentage of GDP and total expenditures on social protection % GDP % SP % GDP % SP % GDP % SP % GDP % SP % GDP % SP % GDP % SP old age ( ) survivors ( ) disability ( ) unemployment ( )/ without ALMP family benefits ( ) sickness ( ) Housing social assistance/social exclusion ( ) Notes: 1. data for 1998 and 1999 does not cover all benefit. It does not take into account in-kind sickness expenditure and social assistance expenditure. Therefore, full data for comparison begin in the categories for the different benefit schemes are taken from ESSPROSS database Source: own calculations based on Esspross dataset provided to Eurostat. The first observation (Table 2) is that social expenditure in Poland is relatively high (21.3 per cent of GDP), especially taking into account the level of development (second lowest GDP per capita in EU). Social expenditure is dominated by pension expenditure. Some 11 per cent of GDP or more than a half of total analysed social expenditure is for old-age purposes. More than 10 per cent of total expenditure (below 3 per cent of GDP) is directed towards disability pension expenditure and additional 1 per cent of GDP (less than 5 per cent of total expenditure) is diverted towards survivor pensions. The lowest share of expenditure is for social assistance, unemployment benefits and family benefits. The trends observed in recent years include: - relative increase in old-age pension spending, which corresponds to both growth in the number of old-age pensioners as well as relative increases of average old-age pension relative to average wage; the latter one was caused mainly by the indexation principles that existed until 2004; - relative decrease in disability pension expenditure from 3.3 per cent of GDP in 1998 to 2.7 per cent of GDP in 2003, which was due to the reduction in the number of disability pensioners, following the implementation of 1997 changes; - stabilization of family, sickness and social assistance expenditure. As far as the structure of the expenditure by type is concerned, majority of them are contributory (pension and sickness expenditure mainly, Table 3). Non-contributory benefits cover social assistance, family and unemployment benefits. It should be noted, that there is a special tax for the Labour Fund paid by employers in Poland, which is used to finance unemployment benefits, however as benefits granted to the unemployed are not linked to the fact of contribution payment, such system should not be assessed as insurance-based. As the system of benefits is dominated by contributory benefits, more than 90 per cent of expenditure is non-means tested. 7

8 Table 3. Expenditures on social benefits by type as percentage of total social benefits Contributory 89.42% 92.20% 89.81% 90.27% 90.35% 91.09% Non-contributory 10.58% 7.80% 10.19% 9.73% 9.65% 8.91% Universal/demogrant 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Categorical % % % % % % Means tested 4.34% 4.50% 4.66% 4.23% 4.27% 4.08% Non-means tested % 95.50% 95.34% 95.77% 95.73% 95.92% Notes: 1. Contributory benefits cover: old-age, disability and survivor pensions, sickness benefits. 2. Non-contributory benefits cover: family benefits and unemployment benefits. 3. In Poland, there are no universal/demogrant benefits. All of social expenditure is either based on insurance system or means-test. Source: own calculations based on Esspross dataset provided to Eurostat. Design features Social protection system is financed mainly from general government contributions that exceed 50 per cent of total contributions by type and also by sector (Table 4). The rest is financed in roughly equal share by employers and individuals. Table 4 Contributions to social protection system per type and sector of origin as percentage of total contribution types employers' contributions 10.73% 31.10% 29.73% 27.68% 26.06% 26.53% individuals' contributions 9.82% 36.72% 24.97% 24.10% 22.98% 23.03% government contributions 52.65% 22.25% 44.92% 47.77% 50.56% 50.10% other contributions 26.62% 9.86% 0.37% 0.45% 0.40% 0.34% sectors corporations 12.64% 31.65% 27.26% 25.52% 24.34% 24.67% general government 77.54% 31.63% 47.53% 50.16% 52.67% 52.29% households 11.62% 37.35% 25.78% 24.87% 23.58% 23.54% non-profit institutions 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Note: the data for 1998 and 1999 does not cover all of the social expenditure, leading to differences in the share of government and individuals contributions in financing expenditure between 1999 and Source: own calculations based on Esspross dataset provided to Eurostat. Most of the social expenditure in Poland is centralized. This applies to the pension benefits, unemployment benefits and family benefits. Social assistance scheme is partially financed by local governments, with the share of local expenditure slightly increasing between 1999 and This increase is expected to continue after 2004, following the changes introduced in the social assistance law. Financing of the main items of social protection expenditure is contributory. This covers social insurance schemes and health care schemes. Each of the schemes has separate rules of contribution payment. There were major changes in financing of social expenditure in 1999, following the pension system and health care reforms introduced in that year. As a result of those changes (described below), the share of individuals in contribution payments increased significantly. It should be noted, that it did not affect the level of net wages, as wages were increased to compensate a part of social insurance contribution paid by employees and the health-care contribution is deducted from the personal income tax. 8

9 Contributory financing The largest part of social expenditure financed from contributions is pension system. There are two separate contributory systems that finance pensions (employee and farmers). Additionally, there are also specific schemes for the so-called armed forces, financed directly from the state budget. However, as these schemes cover 3.6 per cent of pensioners or around 7 per cent of total financing, the bulk of pension expenditure is within contributory schemes. Employee social insurance system is based on contributions paid by employees and employers. It is also divided between different risk types, covered by the insurance. The contribution rates are as follows: Table 5. Rates of social contributions in the Employee system Risk type Employee Employer Total Old-age 1) 9.76% 9.76% 19.52% Disability and survivor 6.5% 6.5% 13.00% Sickness and maternity 2.45% % Work injury 2) - 0.4%-8.12% 0.4%-8.12% Notes: 1) The old-age contribution covered by the mandatory funded tier is split: 12.22% goes to the NDC scheme and 7.3% to funded scheme, 2) The work injury contribtion varies depending on the work injury risk in a given industry and company. Source: The Law on Social Insurance System The system also covers the self-employed, who pay similar contributions, but based on declared income level. This cannot be lower than 60 per cent of average wage. In practice, this is the base declared by virtually all self-employed. Contribution payments have been changed in Until that year, there was only one contribution covering all types of risks in social insurance system and the contribution was paid only by employers. In 1998 the contribution rate was 45 per cent of gross wage. It should be noted that contribution revenues are not sufficient to finance all expenditure from social insurance. As a result, the system is also subsidised from the state budget. There are three kinds of subsidies from the budget: - purpose subsidy that covers benefits paid by social insurance institution but financed from the state budget (outside social insurance system); - subsidy covering the part of contributions transferred to funded part of the system as a consequence of pension reform (covering the transition costs); - supplementary subsidy, covering the outstanding difference between expenditure and revenue. The size of the supplementary subsidy in 2003 (after deduction of the contribution covering transition costs) amounted to around 20 per cent of the contribution revenue. Farmers social insurance system. Farmers social insurance is also contributory. Contributions are flat-rate for two purposes: - for pension insurance, amounting to 30 per cent of minimum monthly pension paid quarterly (annual contribution is equal to 120 per cent of minimum monthly pension); 9

10 - for Contribution Fund, financing short-term insurance (sickness, work injury), the contribution is set by the Supervisory Board of the Fund. The farmers system is heavily subsidised by the state budget (more than 90 per cent of the revenue of the pension insurance). As of 1999, the financing of health care was shifted from general budget to separate health care contribution. The contribution goes to health care financing institution. In 1999, separate 17 health funds (so-called Kasa Chorych) were established (16 regional and one crossnational). In 2003 those funds were merged into one National Health Fund (NFZ). The health care contribution in 2006 amounts to 8.5 per cent of wage (net of social insurance contributions) and it is planned to be increased by 0.25 percentage points each year until it reaches final level of 9 per cent. Health-care contribution, up to the ceiling of 7.75 per cent of wage is deducted from the personal income tax due. Additionally, the state budget is financing contributions for selected groups, most notably farmers and unemployed. The NFZ purchases health-care services from providers and it is the main source of financing the health care sector. Additionally, specific programmes (mainly prophylactic) are financed from the state budget through the Ministry of Health. It is planned that this financing will also include very specialised procedures, that are relatively rare but very expensive. This should help the NFZ to keep its financial stability. On the top of that health institutions (mainly hospitals) are accumulating outstanding debts, which have been covered by the state already several times since the beginning of transition. Non-contributory financing The major schemes that are subject to non-contributory financing include unemployment, social assistance and family benefits (Table 6). The major source of financing the unemployment benefits (passive and to some extend active measures) is the Labour Fund, which is a separate off-budget fund. The Fund is financed mainly from an earmarked tax paid by employers (amounting to 2.45 per cent of the total wage bill in the company). However, as the contributions are not assigned to individuals the right to benefits and level of benefits does not depend on the level of past contribution, this scheme nature is more of non-contributory character. Social assistance in Poland is based on financing targeted benefits, based on the means test. Financing of the social assistance is currently shared between the state budget and local governments budgets. The bulk of the financing is still on the central budget, in the form of open capitation. However, as of 2007, majority of financing will be shifted to local governments. The change in the social assistance organisation was followed by the administrative reform of 1999, where tasks performed by central administration were shifted to local governments. In this structure, most of the benefits and activities are performed on the gmina level by gmina social assistance centres. The family benefits in Poland are financed currently from the state budget. Until 2004, the scheme was rather fragmented, with general family benefit granted to families based on the means test. In 2004, the system was reformed through putting various benefits related to families into one family benefits system. Apart from the family benefits, the system comprises of allowances granted for specific situations: for disabled children, grants to cover costs of the beginning of the school year, benefits to cover the costs of commuting to school and some others. The system is operated by local governments. 10

11 Table 6. Centralization decentralization. Percentage of the benefits by type of level of financing Unemployment open capitation block grant 100% 100% 100% 100% 100% 100% conditional block grant fully locally Pension (first pillar) open capitation 100% 100% 100% 100% 100% 100% block grant conditional block grant fully locally Children's benefits open capitation block grant 100% 100% 100% 100% 100% 100% conditional block grant fully locally Social assistance* open capitation 85.5% 86.7% 86.1% 85.0% 83.9% 83.7% fully locally 14.5% 13.3% 13.9% 15.0% 16.1% 16.3% Source: authors estimates Tax system and its distributional impact. The relatively large social expenditure, particularly on pensions, leads to Poland s high tax wedge, that exceeds the EU-15 and OECD countries averages. This is particularly due to the social security contributions, while personal income tax plays smaller role in the total size of the tax wedge. The evolution of tax burden between 2000 and 2005 shows little changes in this respect in Poland over the analysed period, which is illustrated in Table 7. Additionally, there is little difference it the level of tax wedges between various types of households. Table 7. Evolution of tax burden in Poland by type of households Type of household: Single persons without children at 67% of average earnings Single persons without children at 100% of average earnings One-earner married couple with two children at 100% of average earnings Note: income tax plus employee and employer contributions less cash benefits as % of labour costs Source: OECD Taxing wages database The above result stems mainly from the fact that the tax wedge is dominated by social security contribution for income earners that fall within the first two thresholds of the PIT tax. While high income earners pay higher taxes, at the same time their social security contribution payments are lower, as there is a cap on pension insurance contributions at 250% of average wage. The structure of tax wedge is presented in Graph 1. It shows that: - already for the minimum wage the tax wedge reaches around 40 per cent and it goes up to 47.2 per cent for those who earn 250% of average wage, for higher earnings it falls down; 11

12 - in the case of lower earnings, the tax wedge is driven mainly by social security contributions, the share of personal income tax increases with wage growth; - average wage earners have similar tax wage to those that earn more than PLN per month (around 4 times the average wage); - the tax wedge is relatively flat and for higher income levels digressive. Graph 1. The tax wedge in Poland social security contributions and personal income tax by wage level. Tax wedge 0,50 0,45 0,40 0,35 0,30 0,25 0,20 0,15 0,10 0,05 0, Social security contributions Health care contribution Gross earnings Labour Fund contribution Personal Income tax Source: Ministry of Labour and Social Policy, Department for Economic Analyses and Forecasting. As a result, the design of the tax system, though the personal income tax is actually progressive, leads to very little redistribution in the overall burden of taxes and contributions across various income levels. The structure of the tax wedge shows that the policy of supporting certain social policy initiatives through tax deductions cannot be appropriately addressed especially to low income earners, as they have nothing or very little to deduct from. That is why, any scheme based on the tax deduction is addressed rather to middle and high income earners. Concerning the tax credits, in the personal income tax (PIT) system there exist tax exemptions for single parents. They can pay PIT together with non-working children that had income not higher than tax free threshold or survivor benefit as a source of income, which means that a tax calculation base is divided by two or more persons and tax due is lower. It is also possible to deduct from the tax base costs of higher education and transport, if a child has his/her school in town outside the place where a family lives. Social assistance and certain family benefits are also non taxable. 12

13 Table 8. Tax credits (latest year available and fill new table for every year in the period when major changes occurred) Type of credit: Basis Level (absolute) Level (% of hsh. income) Tax exemptions for single parents: possibility to pay PIT together with non-working children that had income not higher than tax free threshold or survivor benefit as a source of income. Possibility to divide tax basis for PIT per two. Source: Law of 26th July 1991 on PIT (with later changes). Depending on the level of taxable income. There is progressive personal income tax system in Poland (tax exempted income in 2003 equaled 2789,89 PLN). Depth of selected social protection benefits. In this section we analyse the relative value of selected benefits to minimum wage, guaranteed minimum income, average wage, median disposable income after taxes and before transfers and median net disposable income. Since 1998 the relation of the abovementioned values to the average wage varied to some extent (Table 9). The minimum wage, after its increase in 2000 is at the level of per cent of average wage. Guaranteed minimum income exceeds slightly 20 per cent of average wage. The disposable income after taxes and before transfers ranged around a quarter of the average wage (gross), while the net disposable income has been gradually falling from around half of average wage in 1998 to some 43 per cent of average wage in These relations have an impact on assessing the depth of selected benefits. The analysed benefits cover unemployment benefits, old-age pensions paid from mandatory pension system, child benefits and social assistance benefits. Unemployment benefits. The unemployment benefit value ranges from the level close to the guaranteed minimum income per capita to around 60 per cent of minimum wage, with no significant variation in the analysed period of time. Pensions. The value of an old-age pension is the highest from all analysed benefits. It should be noted that the average pension exceeds the median net disposable income. Additionally, the relative value of pension has been increasing in the analysed period from per cent of median net disposable income per capita in 1998 to per cent in Similarly, relative pension value to average wage and guaranteed minimum income has been increasing. This follows the mechanism of pension indexation, which linked the indexation of pensions to projected developments of prices and wages (from 1999 onwards). Child benefits (monthly allowance). The relative value of child benefits is the lowest from all analysed benefits, as this is a benefit that has different nature from other analysed benefits. The value of child benefit has been relatively stable compared to benchmarks used. It is around 6 per cent of gross minimum wage or 2 per cent of average wage. Social assistance benefit. The value of social assistance benefit is below the level of unemployment benefit, constituting more than half of minimum wage or around 45 per cent of median net disposable income per capita. 13

14 Table 9. Depth of selected social benefits (benefits as percentage of) in % gross minimu m wage % GMI 1 (guaranteed minimal income per capita) % average wage % median hsh. income after 2 taxes and before benefits % median hsh. Income after taxes/benefits net disposable income Value of a benefit, PLN 2003 Unemployment Pensions (first pillar) Child benefits 4 (monthly allowances) Social assistance Value of a reference min, PLN Unemployment Pensions (first pillar) Child benefits 4 (monthly allowances) Social assistance Value of a reference min, PLN Unemployment Pensions (first pillar) Child benefits 4 (monthly allowances) Social assistance Value of a reference min, PLN , Unemployment Pensions (first pillar) Child benefits 4 (monthly allowances) Social assistance ,9 Value of a reference min, PLN , Unemployment Pensions (first pillar) Child benefits 4 (monthly allowances) Social assistance Value of a reference min, PLN ,5 1, Unemployment Pensions (first pillar) Child benefits 4 (monthly allowances) Social assistance Value of a reference min, PLN ,

15 Notes: 1 Here used the GMI for a single person (461 PLN), however, it is less per capita in a larger family (316 PLN) 2 Polish Household Budget Survey provides net income 3 Average from retirement system of employee (ZUS) and farmers (KRUS) 4 Child benefits are means tested 5 Social assistance allowance equals the difference between GMI and actual income of a family, not more than 418 PLN per person; 6 The value for the family of 2 adults and 2 children in 2001 was PLN; in PLN; in PLN; in PLN 7 The average gross wage in 1998 was adjusted to the definition valid from 1999, i.e. before PIT and social contributions paid by an employee Source: Statistical Yearbooks, Ministry of Labor and Social Policy database, Laws on social assistance and child benefits, own calculations based on household budget surveys Conditionality of benefits Entitlement to an old-age pension depends on individual's age and contribution history (Table 10). In the current pension system it was possible to add to periods during which social security contribution was paid several non-contributory periods (like: obligatory army service, high school education, maternity leave and child bearing period). After 1999 reform only periods during which contributions are paid matters to the minimum required contribution history. Right to the benefit is suspended if the retired person works, is younger than 60 years in case of women and 65 years in case of men and earns more than 130 per cent of the average salary. After reaching normal retirement age there are no restrictions on combining work and receiving retirement benefit. 15

16 Unemployment Pension (first pillar) Children s benefits Social assistance Table 10. Conditionality of selected types of benefits Age Contribution history Reside nce Means testing Type of means testing over 18 and below retirement age 60 (women)/65 (men), some possibilities of early retirement until end of 2007 year child aged up to 16 or to 24 when in higher education or disabled minimum 365 days of work in the last 18 months minimum 20 yrs (women) or 25 yrs (men) Level of means testing (2) Max. family solidarit (1) y (3) yes no yes no no yes yes 3 Family income per capita below PLN 504 monthly, or PLN 583 monthly if a child is disabled. no no yes yes 3 Income for a one-person household below 461 PLN, in larger households: 316 PLN per person. Local government can increase income thresholds entitled to temporary benefits. Notes: (1) Type of means testing = means taken into account: 1 = income out of labour only; 2 = income out of pension only; 3 = all income; 4 = income and assets. (2) Level of means testing: threshold in % of median household income after taxes/benefits. Maximum level of family solidarity = means of following persons taken into account: 1 = person/beneficiary only; 2 = 1 + cohabitating official spouse only; 3 = 1 + partner cohabitating; 4 = 1 + official spouse non-cohabitating; 5 = 3 + children cohabitating; 6 = 3 + children non-cohabitating; 7 = 3 + parents cohabitating; 8 = 3 + parents non-cohabiting; 9 = 5 + grandparents/grandchildren cohabiting; 10 = 5 + grandparents/children non-cohabiting; 11 = 5 + all family members in third degree. Unemployment benefits are granted to people over 18 years and below retirement age if they are registered in the public labour office and worked for at least 365 days in 18 months preceding registration. During work they also had to earn at least half of the minimum wage. Duration of benefits in case of unemployment additionally depends on the labour market situation in the region: the higher unemployment rate, the longer benefit is paid (Table 11). Per capita net income is used for means-testing in case of family benefits and social assistance. However, levels of means testing are different here (Table 4a), they are higher for

17 "pure" family benefits than for social assistance. Additional factor influencing entitlement to the benefit is disability: family benefits are paid for a longer period to families where a child is disabled, also permanent social assistance benefits are dependent on the disability of its recipient. It is worth mentioning that in case of social assistance, also additional factors are analysed by the social assistance worker to grant the right to the benefit. Apart from disability it can be: homelessness, long-term unemployment, long-term sickness, being an orphan, home abuse, addictions, single parenthood, problems with adaptation to society after leaving prison, special crisis situation. The fact of poverty alone does not provide enough reason to get the social assistance benefit. Table 11. Maximum duration of benefit in months (latest year available and fill new table for every year in the period when major changes occurred) Number of months Unemployment State unemployment benefit is paid for: - 6 months in regions where unemployment rate is below the national average, - 18 months in regions where unemployment rate is above 200% of national average, - 12 months in other regions. Children* Social assistance The flat-rate child allowance is income-tested (since May 2004) and paid monthly up to the age of 18, or 21 if a child is in education, or 24 if a child is in higher education and disabled. There exist permanent social assistance benefit and temporary social assistance benefit paid up to the decision of social worker, based on the assessment. Note: *The reform of family benefits was implemented in May The main elements included: implementation of income threshold for family benefits, replacement of various benefits paid to families with one benefit and additions to it. Additions to the family benefit: for the child bearing (lump-sum), taking care for a child during the child-care leave (up to 24 months or 36 months in case of multiple birth or 72 months in case of a disabled child), for lone parents and loss of a right to unemployment benefit, (3 years or shorter), for lone parents (dependent on the right to family benefits), for the beginning of the school-year (lump-sum, paid in September), for education and rehabilitation of a disabled child (until the age of 16 or 24 in the case of moderate and severe disability). Sources: Law of April 20 th, 2004 on employment promotion and labour market institutions; Law of November 28 th, 2003 on family benefits; Law of March 12 th, 2004 on social assistance. There are no compulsory activation measures for persons entitled to social protection benefits in Poland. Existing and implemented regulations and programmes focused on activating the unemployed or the disabled people are voluntary for beneficiaries. In case of social assistance in 2004 there was introduced possibility to sign so called social contract between a social worker and a beneficiary. By now, that solution has not been used often. Output Beneficiaries Depending on the type of the system, the analysis of the range of granted and paid benefits requires different benchmark. In the case of pensions or unemployment benefits the number of beneficiaries can be compared to the population size, though it should be noted that these benefits are targeted 17

18 towards persons in specific age brackets, like old-age pensions towards people in postworking age or unemployment benefits towards persons in working age. The evolution of the number of social protection beneficiaries depends highly on the type of the system. The increase in the number of beneficiaries was observed for old-age pensions, in effect of combined demographic structure of the population (baby-boomers born in late 1940s and early 1950s) and wide possibilities of early retirement. The old-age pension system reform introduced in 1999 did not cover persons that were older than 50 years at that time, and foresaw transitory period for others. So, first changes in the number of old-age pension beneficiaries due to the pension reform implementation can be expected only after As the analysis shows (Table 12), some 17 per cent of Polish population (figure for total population in Table 13) receives old-age benefits, which is relatively large mainly due to low effective retirement age. This share is quite stable over time. The reduction of effective retirement age that was noted in Poland at the beginning of 1990s followed, most importantly, economic transition and restructuring of employment early retirement was seen as a tool to absorb a part of the employment shock. Table 12. Number of beneficiaries (annual averages in thousand) Old-age pensions Survivors Disability Early retirement for labor market reasons Source: Esspross dataset Table 13. Number of beneficiaries (annual averages) Unemployment Sickness 1) Social assistance benefits Cash benefits, including: Benefits: permanent permanent compensatory temporary appropriated Social pension Maternity care Shelter Meals Clothing Treatment costs In-kind benefits Family and nursing benefits Family benefits Nursing benefits 2) Housing benefits 3) Total population

19 Notes: 1) average monthly number of sick days financed from Social Security Fund in thousand 2) total annual number of benefits (in thousand) 3) average monthly number of benefits (in thousand) Source: National statistics By the same token, there is relatively large group of disability pensioners, however due to reduced inflow after the reform in 1997 and somewhat increased outflow from this scheme, the share of population receiving disability benefits dropped from 6.7 per cent to 5.7 per cent between 2000 and The number of persons receiving survivor pensions is stable over time, as there were not significant legal changes that could affect these benefits. Changes in the legislation on early retirement due to labour market reasons as well as gradually phasing out restructuring processes also led to drop in the number of persons receiving these benefits from 0.7 per cent of total population in 2000 to 0.3 per cent in Between 1998 and 2003 the number of the unemployed entitled to the unemployment benefit ranged around 500 thousand, with some variation. This was regardless the overall increase in the unemployment rate and the number of unemployed persons (3176 thousand by the end of 2003). This points to the long-term nature of the unemployment in Poland discussed before, as only around 15 per cent of the unemployed are entitled to the unemployment benefit payment. This means that less than 1.5 per cent of total population received such benefits. In case of sickness beneficiaries changes implemented in 2000 led to the significant drop in the number of sickness days. Some increase of the sickness incidence in 2003 is due to the change in the labour code that was aimed to reduce sickness incidence through introduction of a waiting day. As this measure was applied only to short-term sick leaves, the number of longer sickness periods increased, resulting in overall increase of absenteeism. This measure was dropped in As far as social assistance benefits are concerned, the range of benefits is quite large. If we analyse the most frequently granted benefits appropriated, the number of such benefits increased over time, following relative increase in poverty in Polish population. The same applies to the most popular in-kind benefit, which is providing the beneficiaries with meals. As it was mentioned before, the entitlement to old-age or unemployment benefits depends on individual work/contributions history or age of the person which means that the situation in the social security system and demographic composition of the whole household is not relevant here. The opposite concerns family benefits and social assistance with main types of benefits income tested. In case of family benefits we do not concern here maternity leave benefit paid just after giving birth to a child which is more of the insurance type and depends on previous earnings of a woman. Some possible entitlements can be presented for five hypothetical household types (Tables 14a-14d). In general, having right to the old-age pension, unemployment benefit or earning average wage protects against falling below threshold entitling to social benefit in the households with adults only. Presence of children in a household increases probability that they will receive the benefit, by decreasing per capita income. 19