SOCIAL SECURITY/INSURANCE
EU – population by age group and sex, 2022 and 2070 (thousands)
OLD DEPENDENCY RATIO
is the ratio of the number of elderly people at an age
when they are generally economically inactive (i.e.
aged 65 and over), compared to the number of people
of working age (i.e. 15-64 years old)
Table 1 Old dependency ratio
Decomposition of the old-age dependency ratio (%)
Old-age dependency ratios in 2022 (%)
Percentage point change 2022-2100
Public and private social expenditure (% GDP)
Time period 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Austria 28,1 27,2 27,6 28,0 28,3 28,3 28,2 27,8 27,6 27,7 31,1 31,1 29,4
Belgium 27,7 28,1 28,0 28,3 28,4 29,1 28,4 28,3 28,4 28,2 32,3 29,7 29,0
Czechia 19,5 19,6 19,9 20,7 20,1 19,3 18,9 18,9 19,1 19,5 22,6 22,5 22,0
Denmark 29,9 30,0 30,2 30,0 30,0 30,0 29,4 29,0 28,5 28,4 29,3 28,3 26,2
Estonia 18,1 16,2 15,8 15,7 16,0 17,3 17,5 17,0 17,5 17,9 19,8 18,4 17,2
Finland 27,4 27,1 28,3 29,4 30,2 30,5 30,4 29,6 29,4 29,4 31,0 30,3 29,0
France 31,0 30,7 31,2 31,7 32,0 31,8 31,9 31,4 31,0 30,7 34,9 32,7 31,6
Germany 26,1 24,8 24,7 24,8 24,8 25,1 25,3 25,2 25,3 25,6 27,9 27,6 26,7
Greece 25,0 26,5 27,4 25,4 25,5 25,7 26,0 25,2 25,0 25,1 27,9 26,1 24,1
Hungary 22,8 22,2 22,5 22,2 21,3 20,3 20,2 19,4 18,6 17,6 18,5 18,1 17,2
Ireland 24,1 23,3 23,0 21,8 20,1 15,2 15,1 14,2 13,5 12,9 15,7 14,2 12,8
Italy 26,9 26,5 27,3 27,9 28,1 28,3 27,9 27,7 27,5 27,7 32,6 30,7 30,1
Latvia 19,1 16,9 15,3 15,5 15,4 15,7 16,0 15,8 16,1 16,5 18,5 19,8 19,7
Luxembourg 21,7 20,6 20,7 20,9 20,8 20,5 20,3 20,7 21,0 21,6 23,9 21,6 21,9
Netherlands 17,5 17,5 17,9 18,1 17,9 17,6 17,5 16,6 16,3 16,3 18,9 18,7 17,6
Poland 20,7 19,6 19,9 20,6 20,3 20,2 21,2 20,8 20,5 21,2 23,2 22,6 22,7
Slovak Republic 17,4 17,1 17,3 17,7 17,7 17,2 17,6 17,5 17,2 17,5 19,8 19,6 19,1
Slovenia 23,4 23,4 23,5 23,8 23,1 22,7 22,2 21,5 21,3 21,5 24,5 23,7 22,8
Spain 24,9 25,5 25,6 25,7 25,4 24,7 24,2 23,9 24,0 24,6 31,2 29,5 28,1
Sweden 25,8 25,3 26,3 26,9 26,6 26,1 26,5 25,9 25,6 25,1 25,9 24,9 23,7
Portugal 24,3 24,2 24,3 25,4 25,0 23,9 23,5 22,7 22,5 22,3 25,1 24,8 24,6
Social security - definition
Social security covers the granting of financial
resources (insurance benefits) authorized by special
bodies (insurance agencies/funds) to persons who are
subject to them (insured), is exposed to income-
reduction risk or costs-increase risk (insurance risks)
and have completed the predefined working period and
financial contribution conditions (time insurance,
insurance contributions).
Social security
A typical social security system provides
income during periods of
unemployment, ill-health or disability,
and financial support, in the form of
pensions, to the retired.
DEFINITION OF SOCIAL INSURANCE
protection of the individual against
economic hazards (such as
unemployment, old age, or disability) in
which the government participates or
enforces the participation of employers
and affected individuals
Social security/insurance plays three consumption
smoothing roles:
• save when working at young age for when
retired at older age
• insure against the risk of disability at older
age
• insure against longevity
Reasons of providing the social security/insurance
by the government:
• people don’t save sufficiently
(paternalism)
• failure of market for annuities
• redistribution and poverty relief
History
The first modern country to introduce the kind
of welfare programs was the German empire
under the leadership of the "iron chancellor"
Otto von Bismarck, who enacted sickness
insurance bill in 1883, followed by the
accident insurance bill in 1884, and old age
& disability insurance bill in 1889.
History
Danish’s universal flat-rate model in 1891 was
instituted to provide limited coverage and meager
benefits to disabled workforce. This model was
based on the principle of universalism or citizenship.
History
Great Britain’s old age pensions act was
enacted in 1908 and the national insurance act
in 1911, Sweden enacted compulsory old-age
pensions in 1915, Switzerland in 1925 in the
United States, the social security act was
enacted in 1935.
History
By 1940, 33 countries had some kind of old-
age social security program. By 1958 the
number of countries was 80 and by 1979, 123.
The number in 1989 was 130, now 166.
MAIN FEATURES OF SOCIAL INSURANCE
• It involves the establishment of a common monetary fund
out of which all the benefits in cash or kind are paid, and
which is generally built up of the contribution of the
workers, employers and the state.
• The contribution of the workers is merely nominal and is
kept at a low level so as not to exceed their paying
capacity, whereas the employers and the state provide the
major portion of the finances.
MAIN FEATURES OF SOCIAL INSURANCE
• Benefits are granted as a matter of right and without any
means test, so as not to touch the beneficiaries’ sense of
self-respect.
• SI is provided on a compulsory basis so that its benefits
might reach all the needy persons of the society who are
sought to be covered.
• The benefits are kept within fixed limits, so as to ensure
the maintenance of a minimum standard of living of the
beneficiaries during the period of partial or total loss of
income.
Percentage of persons with severe disabilities receiving cash benefits 2020
Effective coverage by population group (%), 2020
Public expenditure on old-age and survivors cash benefits in % GDP
Time period 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Austria 13,0 12,8 13,0 13,3 13,4 13,3 13,1 12,9 12,9 13,0
Belgium 9,9 10,1 10,0 10,3 10,3 10,5 10,4 10,5 10,6 10,7
Czechia 8,0 8,3 8,6 8,6 8,3 8,0 7,9 7,7 7,6 7,9
Denmark 7,1 7,4 7,6 7,8 8,0 8,1 7,9 8,0 8,0 8,1
Estonia 7,6 6,7 6,5 6,5 6,4 6,9 6,8 6,5 6,5 6,6
Finland 9,8 9,8 10,5 11,1 11,5 11,5 11,8 11,8 11,8 11,9
France 13,2 13,3 13,6 13,8 13,9 13,8 13,8 13,6 13,6 13,4
Germany 10,8 10,3 10,3 10,2 10,1 10,2 10,2 10,2 10,2 10,4
Greece 14,3 16,1 17,3 16,1 16,5 17,5 17,3 16,3 15,9 15,7
Hungary 9,5 9,7 10,3 10,2 9,5 9,0 8,9 8,4 8,0 7,6
Ireland 5,2 5,4 5,5 5,3 5,1 3,8 3,8 3,6 3,5 3,3
Italy 15,4 15,4 15,9 16,3 16,2 16,2 15,8 15,7 15,7 15,9
Latvia 9,2 8,1 7,5 7,5 7,2 6,9 6,9 6,8 6,8 6,8
Lithuania 7,7 6,9 6,9 6,6 6,8 6,7 6,4 6,2 6,4 6,4
Luxembourg 7,5 7,3 7,9 7,9 8,0 8,0 8,0 8,3 8,5 8,7
Netherlands 4,9 5,0 5,2 5,3 5,4 5,3 5,3 5,2 5,0 5,0
Poland 11,0 10,6 10,9 11,3 11,2 11,1 11,0 10,6 10,7 10,9
Portugal 12,0 12,7 13,0 13,9 13,9 13,3 13,1 12,7 12,6 12,4
Slovak Republic 6,7 6,7 6,9 7,2 7,4 7,2 7,3 7,3 7,2 7,1
Slovenia 10,9 11,1 11,3 11,6 11,4 11,1 10,9 10,4 10,2 10,0
Spain 9,2 9,6 10,3 11,0 11,2 11,0 11,0 10,9 11,1 11,3
Sweden 7,2 6,9 7,3 7,6 7,3 7,1 7,2 7,2 7,1 7,0
Percentage point change in pension expenditure between 2020-22 and 2050
CURRENT AND PROJECTED PENSION SPENDING AS A PERCENTAGE OF GDP 2010 TO 2060
Public pension benefit ratio (average pension benefit as % of average wage)
INCOMES IN OLD AGE
RETIREMENT-INCOME PACKAGES
PENSION INTENSIVES TO WORK/RETIRE
Types of pension arrangements
➢ contributory
✓ pay-as-you-go pension systems
✓ fully funded pension system
➢ noncontributory universal
pension
Pay-as-you-go
Pay-as-you-go pension systems are types of
pension arrangements and based on inter-
generational transfers. In particular, wage
taxes and welfare contributions of current
workforce support current pensioners.
Pay-as-you-go
In a pay-as-you-go (PAYG) social security
program the current contributions through
taxation of those in employment provide the
pensions of those who are retired. At any
point in time the contributions to the system
must match the pension payments made by
the system.
Pay-as-you-go
A pay-as-you-go pension system is one that
finances pensions for retired workers in a
given year entirely by contributions or taxes
paid by currently employed workers
benefits received by retired = contributions of
workers
Pay-as-you-go schemes
▪ payment collected from today’s workers to
pay benefits for today’s retirees
▪ contractarian in nature, run by the state
▪ source of financing is subject to
demographic, economic, and political risks
resulting fund revenues to experience high
volatility
fully funded pension system
A fully funded pension system is one in which benefits
are paid out of a fund built up from contributions by, or
on behalf of, members in the retirement system. The
dollar value of the fund must equal at least the
discounted present value of pensions promised to
members of the system in the future. A member of a
fully funded private pension system contributes
monthly to the pension plan (or the employer
contributes along with or instead of the employee).
fully funded pension system
A pension system in which an individual’s
benefits are paid out of deposits that have
been made during his or her working life, plus
accumulated interest.
fully funded pension system
▪ savings used to pay future benefits
▪ contributions are invested in assets
▪ returns are credited to the scheme’s fund
Difference between PAYG and fully funded scheme
▪ PAYG allows for redistribution/insurance
across generations
▪ PAYG allows every generation to receive
more than it contributes if rate of growth >
interest rate
▪ PAYG entails a legacy debt: first
generation could receive benefits without
contributing
Noncontributory universal pension
A program which provides defined benefits,
generally funded out of the public purse, and
steers funds towards people in situations of
poverty or some other high-risk position.
Noncontributory universal pension
These programs can basically be sub-divided
into:
✓ guaranteed minimum pensions (PMGs)
✓ social pension
• “universal” pensions
• targeted (“welfare”) pensions
Noncontributory universal pension
PMGs are granted to people whose accumulated
funds in contributory schemes are below a
minimum considered to be necessary to avoid
poverty in old age. Although PMGs are granted on
the basis of prior contribution requirements, they
are considered as a type of non-contributory
pension in the sense that their beneficiaries do not
“pay” for their pension. This is paid to them by the
state.
Noncontributory universal pension
Social pension is subject to an examination of the
income of the individual or family, on the basis of
which the need for such a pension is confirmed.
The final aim of social pensions, is to guarantee a
minimum level of resources but, unlike the PMGs,
they are unrelated to any prior contribution to the
system on the part of the beneficiaries.
In general, these pensions are financed by the state
with general taxes
Percentage of the working-age population aged 15+ legally
covered by old-age pensions, by type of scheme, 2020
ARCHITECTURE OF NATIONAL PENSION SYSTEMS
Three pillars:
▪ government-provided pension benefits
▪ employer-provided accounts
▪ individual retirement accounts
THE ROLE AND OBJECTIVE OF EACH
PART OF THE THREE ”TIERS” PILLARS
The first tier (redistributive) comprises
programs designed to ensure pensioners
achieve some absolute, minimum standard of
living.
The second-tier, savings components are
designed to achieve some target standard of
living in retirement compared with that when
working.
THE ROLE AND OBJECTIVE OF EACH
PART OF THE THREE ”TIERS” PILLARS
Third tier
type of privately managed pension funds
i.e., pension provision could be mandatory or voluntary,
pension plans could be linked an employment
relationship, making them occupational pension plans, or
be personal plans; pension provision could be organized
through defined contribution or defined benefit
arrangements.
THE ROLE AND OBJECTIVE OF EACH
PART OF THE THREE ”TIERS” PILLARS
Occupational pension plans are dominant in
Western Europe, North America, Asia-Pacific
countries nad Brasil. These plans are voluntary
in the United Kingdom and the United States,
mandatory in Australia and quasi-mandatory
(i.e. most workers are enrolled as a result of
employment agreements between unions and
employers) in the Netherlands.
THE ROLE AND OBJECTIVE OF EACH
PART OF THE THREE ”TIERS” PILLARS
Latin American and Central and Eastern
European countries, on the other hand, rely
mainly in mandatory personal pension plans.
Within these tiers, schemes are classified further by provider
(public or private) and the way benefits are determined.
First-tier (redistributive schemes) -
programmes aimed to prevent poverty in old
age.
Are provided by the public sector of three
main types.
• resource-tested or targeted plans
• basic schemes
• minimum pensions
FIRST-TIER
Resource-tested or targeted plans pay a
higher benefit to poorer pensioners and
reduced benefits to better-off retirees. In these
plans, the value of benefits depends either on
income from other sources or on both income
and assets.
FIRST-TIER
All countries have general social safety-nets
of this type, but in some cases they only cover
a few older people who had many career
interruptions. Full-career workers with low
earnings (30% of the average) would be
entitled to resource-tested benefits in these
countries.
FIRST-TIER
Basic schemes pay either flat rate benefits
(the same amount to every retiree) or their
value depends only on years of work, not on
past earnings. Additional retirement income
does not change the entitlement.
FIRST-TIER
Minimum pensions, which share many
features with resource-tested plans. The value
of entitlements takes into account only of
pension income: unlike resource-tested
schemes, it is not affected by income from
savings.
basic, targeted and minimum pensions
SECOND AND THIRD TIERS
Defined-benefit (DB) plans are provided by the
public sector or private (occupational) schemes
are mandatory or quasi-mandatory. Retirement
income depends on the number of years of
contributions and individual earnings (worker’s
history of pensionable earnings). The formula
may be based on the worker’s final wage and
length of service, or on wages over a longer
period, i.e. the worker’s full career.
SECOND AND THIRD TIERS
In a pure DB, the benefit does not depend on
the amount of assets accumulated in the
person’s name; instead, funds are adjusted to
meet obligations; thus the risk of varying
rates of return to pension assets falls on the
sponsor.
SECOND AND THIRD TIERS
Defined-benefit plans promise the employee
a certain pension. To be fully funded, these
plans must collect contributions to finance a
fund that will amass adequate earnings to pay
the promised pensions.
SECOND AND THIRD TIERS
Administrators of fully funded retirement
systems invest the funds of the pension
system in various financial obligations,
seeking to obtain reasonable rates of return on
the fund while balancing the return earned
with any risks associated with their
investments.
SECOND AND THIRD TIERS
Defined benefit schemes
• wage history used to calculate pension
• include set of wages, length of service
• sponsor (= tax payers) bears some risks
SECOND AND THIRD TIERS
Defined-benefit pension plan overall provides
generous benefits to its members, which
makes defined-benefit pensions extremely
expensive for both public and private funds.
Potential imbalances can be absorbed by the
state budget, but this is unbearable for the
employer that is why most companies have
scaled back or switched, to a defined
contribution plan instead.
SECOND AND THIRD TIERS
Points schemes. Workers earn pension points
based on their earnings each year. At
retirement, the sum of pension points is
multiplied by a pension-point value to convert
them into a regular pension payment.
SECOND AND THIRD TIERS
Notional-accounts schemes - notional
defined-contribution plans (NDC). These
record contributions in an individual account
and apply a rate of return to the balances. The
accounts are “notional” (virtual) in that the
balances exist only on the books of the
managing institution.
SECOND AND THIRD TIERS
At retirement, the accumulated notional
capital is converted into a stream of pension
payments using a formula based on life
expectancy. This is designed to mimic DC
schemes.
SECOND AND THIRD TIERS
Defined-contribution (DC). In these
schemes, contributions flow into an individual
account. The accumulation of contributions
and investment returns is usually converted
into a pension-income stream at retirement. A
pension in which the benefit is determined by
the amount of assets accumulated toward a
person’s pension.
SECOND AND THIRD TIERS
A defined-contribution pension plan, under
which the worker (or the employer)
contributes a certain amount per year and
receives a pension based on the contributions,
earnings of the pension fund, and the fund’s
payout experience.
SECOND AND THIRD TIERS
When the workers retire, they receive a
pension based on the amount of contributions
(a form of saving) plus the return earned (net
of administration costs) on those contributions
over the period of time the money was held
(and invested) by the retirement system.
SECOND AND THIRD TIERS
Defined contribution schemes
• accumulate contributions and returns in
account
• account used to finance/calculate pension
• retirees bear risks: real rates of return to
assets, future pricing of annuities
Valorisation (pre-retirement indexation) -
whereby past earnings are adjusted to take
account of changes in living standards
between the time pension rights accrued and
the time they are claimed.
The common practice is to revalue:
•earlier years’ pay with the growth of average
earnings
•earnings only with price inflation (Belgium,
France and Spain)
•earlier years’ earnings to a mix of price and
wage inflation (Finland, Portugal and Turkey)
Most countries set a limit on the earnings used
to calculate both contribution liabilities and
pension benefits.
Indexation refers to the uprating of pensions
in payment. Price indexation is most
common, but also uprate benefits with a mix
of inflation and wage growth. Some countries
have progressive indexation, giving larger
increases to low pensions.
Member State Pension schemes Funding source Contribution rates Valorisation of pensionable Indexation of
(Country specific) pensions in
payment
Public pensions Contributions 9.35% employer; 9.35% employee Wage growth – sustainability factor Wage growth –
Germany sustainability factor
Occupational pensions does not exist
Private pensions does not exist
Public pensions Contributions 34.75% (23.75% employers; 11% Reference earnings are projected According to CPI and GDP
Portugal employees) according to labour productivity growth growth
and adjusted according to the CPI
Occupational pensions does not exist
Private pensions does not exist
Public pensions Contributions 25.8% Average wage growth
United (13.8% employers; 12% employees)
Kingdom Occupational pensions Contributions 8% Fund growth Prices
Private pensions does not exist
Public pensions Contributions and general Employer: none; Employee: 20% – if not 30% CPI and 70% wage growth 30% CPI and 70% wage
Croatia budget participating in the 2nd pillar; 15% – if growth
participating in the 2nd pillar
Employer
Occupational pensions does not exist
Private pensions Contributions Employees: 5% Market rate of return 30% CPI and 70% wage
(Mandatory fully funded growth
DC scheme)
Public pensions Taxes and contributions Taxes: 25% Contributions: 75% Inflation
Nederland
Occupational pensions Tax exemption, contributions Tax exemption: 10%; Contributions: 20%; Inflation
and returns on investment Returns on investment: 70%
Private pensions Tax exemption and Unknown Inflation
contributions
Normal pension age
Age at which an individual qualifies for full Social
Security retirement benefits.
The most OECD countries have a normal pension
age of 65 or plan to reach that level in the future. In
some of these, normal pension age for women will
be lower than for men (Chile, Italy, Switzerland).
Some countries will have normal pension ages for
men and women above age 65 (Iceland, Norway,
Australia, Denmark, Germany, the United States)
NORMAL RETIREMENT AGE
Early retirement
Benefits for early retirees are usually cut to reflect
the longer period over which the pension is paid.
In most defined-benefit and points schemes, the
adjustment is simply a parameter of the pension
system: the benefit is permanently reduced by x%
for each year of early retirement.
Late retirement
It is possible to defer claiming a pension until after
the normal age in nearly all countries. Typically, an
increase in accrued benefits is provided, at an
average of 4.8% per year of deferral. However, the
ability to combine work and pension receipt after
normal pension age is common and so the size of
the increment will have little influence on people’s
financial incentives to remain in work.
The gross replacement rate is defined as
gross pension entitlement divided by gross
pre-retirement earnings. The replacement
rate is expressed as the ratio of the pension
to final earnings (just before retirement)
FUTURE MANDATORY REPLACEMENT RATE
THE RATE OF CONTRIBUTION TO SOCIAL INSURANCE IN
POLAND
Total Payer (%) Insured
contribution person (%)
(%)
Old-age pension insurance 19,52 9,76 9,76
Disability and survivours’ 8 6,5 1,5
pension insurance
Sickness insurance 2,45 - 2,45
Work accidence insurance 0,67-3,33 0,67-3,33 -
Polish old-age pension
Criteria of First pillar Second pillar Third pillar
classification
Status of the scheme universal universal supplementary
Participation in the compulsory voluntary* voluntary
scheme
Social objective basic level of basic level of higher level of
benefit benefit benefit
Scheme management public private private
Financing current funded funded
contributions
Calculation of benefit on the basis of on the basis of on the basis of
amount indexed capitalized capitalized
contributions contributions contributions
BACKGROUND INFORMATION:
THE POLISH PENSION SYSTEM CONSISTS OF THREE PILLARS AT THE
MOMENT:
• THE 1ST PILLAR is run by the social security institution and based on
notional dc accounts, where employee and employer pension
contributions are being “registered”.
• THE 2ND PILLAR consists of pension funds where employee
contributions are invested on the financial market.
• THE 3RD PILLAR is a tax qualified corporate pension scheme
(pracownicze programy emerytalne, ppe) and individual pension
products individual retirement account and individual pension security
acccount (so called IKE and IKZE).
CHANGES ON THE HORIZON:
• THE 2ND AND 3RD PILLARS are going to be changed significantly if
the reform becomes effective.
• THE 2ND PILLAR funds will be closed and transformed into
investment fund companies. major part of the current fund assets and
their members will be transformed as well.
• IN TERMS OF THE 3RD PILLAR, new auto enrollment pension plans
(pracownicze plany kapitałowe, PPK) were introduced in 2019 R.
CHARACTERISTICS OF THE PPK:
• AS OF 2019 COMPANIES ARE OBLIGED TO OFFER PPK AND CONTRIBUTE AT LEAST 1.5% OF
THE INDIVIDUAL TOTAL SALARY.
• COMPANIES WHICH EMPLOY MORE THAN 250 EMPLOYEES WILL BE COVERED BY NEW
LEGISLATION AS OF JANUARY 2019, AND FOR COMPANIES WITH 50-250 EMPLOYEES AS OF
JULY 2019.
• UNDER CERTAIN CIRCUMSTANCES, THE NEW PPK PLANS WILL WORK AS AN AUTO
ENROLLMENT MODEL.
• HOWEVER, COMPANIES OFFERING PPE WILL NOT BE FORCED TO SET UP PPK. IN ORDER TO
MAINTAIN THIS EXCEPTION, THE EMPLOYER CONTRIBUTION IN PPE WILL HAVE TO BE AT THE
LEVEL OF 3.5% OF INDIVIDUAL TOTAL SALARY.
• PPK ASSETS WILL BE MANAGED BY PRIVATE INVESTMENT FUND COMPANIES AS WELL AS
DEDICATED GOVERNMENTAL INSTITUTION (S) BECAUSE THE POLISH MODEL FOLLOWS UK AUTO
ENROLLMENT AND NEST, THE NATIONAL EMPLOYMENT SAVINGS TRUST CONCEPT.
