What determines the amount of the pension? Years of work are not everything

Every fourth young adult does not think about his retirement at all – according to a pension awareness survey described in Monday’s “Rzeczpospolita”. According to expert forecasts, current 40-year-olds may receive PLN 2,000-3,000. PLN – provided they have had no breaks in employment and work full-time.

We write more about the study here.

When can you retire?

Poland is one of the fastest aging societies in the European Union. In 2060, there will be more people receiving benefits in Poland than paying contributions. This is very bad news for today’s working people. If someone thinks that this does not pose a threat to him in terms of future benefits, because contributions are deducted from his salary every month, he is wrong. The fewer people working, the more difficult the situation of people entitled to a pension will be.

Let’s start with the fact that the pension system in force since 1999, the time of the great pension reform, does not require any minimum length of service for pension benefits. It is enough to pay ZUS contributions for 1 day to obtain the right to a pension. So if you ever read about pensions amounting to one or two groszy, they are paid to people who have worked legally for a very short time.

The second condition for receiving a pension is reaching the retirement age, which is 60 for women and 65 for men. Therefore, a person who no longer wants to continue working and reaches retirement age and has at least one day of “contributory experience” can apply for a benefit and join the group of retirees.

However, seniority applies to the guaranteed minimum pension: women must document 20 years of work experience, and men 25 years. In 2024, the minimum pension is PLN 1,780.96, which is increased every year.

What determines the amount of the pension?

How does ZUS calculate the pension due? It takes into account three most important elements:

How does ZUS calculate how much we are owed? Retirement has three main pillars:

• indexed initial capital (up to and including 1998);

• indexed pension insurance contributions recorded in our ZUS account;

• indexed funds on the ZUS sub-account if you are an OFE member.

We will now describe in more detail what constitutes the amount of your future pension.

Capital accumulated in a retirement account

It is:

• The sum of the amounts of indexed pension insurance contributions recorded on the insured person’s individual account. “Indexed”, i.e. increased by a certain index in order to maintain their real value (valorization takes place once a year, in March, but work is underway to introduce a double indexation mechanism)

• valorized so-called initial capital (due to professional activity before 1999),

• and the sum of funds saved on the sub-account for OFE members.

Life expectancy

This factor is intended to reflect how long you expect to receive benefits in retirement. As life expectancy increases, forecasts of the average continued benefit collection by retirees in Poland also increase from year to year.

ZUS determines the amount of the pension by dividing the basis for calculating the pension by the average life expectancy. For this reason, retiring even a year later significantly increases the amount of benefit you receive. Not only do we increase the capital accumulated in the retirement account (i.e. the numerator of the entire equation), but we also reduce the expected length of receiving the pension (the denominator).

It’s worth working a few more years

– By postponing the decision to retire for 5-7 years, depending on the period, we can even double the amount of the benefit – said in 2023 former president of the Social Insurance Institution, Professor Gertruda Uścińska.

She explained that pensions from the Social Insurance Fund are calculated according to the defined contribution principle. – This means that the more contributions we pay and the later we retire, the higher the benefit we will receive. Retiring early means lower benefits. Postponing the decision to retire for a year may increase the future benefit by up to 10-15 percent, said Gertruda Uścińska.

The President of ZUS emphasized that “each subsequent year brings more than proportional benefits.”

– This is how compound interest works. By postponing the decision to retire for 5-7 years, depending on the period, we can even double the amount of the benefit that will be awarded to us and calculated. This is due to the payment of additional contributions, their indexation and the smaller number of months of retirement included in the calculations, she explained.

Where do record pensions come from?

Uścińska gave the example of a woman who retired at the age of 81 years and 6 months, having had over 61 years of work experience. – Today she receives the highest women’s pension in Poland, which amounts to PLN 26,800 – said the president of ZUS.

We write more about retirement record holders below. It’s no secret: their very high pensions are the result of many years of postponing the decision to retire. This does not mean that each of us should work until our 80th birthday, but remaining on the labor market a few years after reaching retirement age – even on a reduced working basis – is a way to increase the amount of benefits.