Simulation model to forecast the consequences of changes introduced into the 2nd pillar of the Polish pension system

a r t i c l e i n f o The 2nd pillar of the Polish pension system was recently modified. The government lowered the amount for obligatory contributions transferred to private open pension funds and redirected the difference to notional accounts. A Monte Carlo simulation model was developed to compare two variants of the Polish pension system. In the previous system, the premium was accumulated in open funds, and interest was earned as a result of real financial market mechanisms. In the current system, the premium is split into two flows, where one flow accumulates on the notional account and is indexed according to the rules defined by legislation. Assuming the same macroeconomic circumstances, the economic implications of the new and previous pension system strategies were formulated from an individual worker's perspective. Terminal value and risk associated with investment were used to compare both systems. Simulation analysis for the 2nd pillar was run for this portion of the contribution, which had previously been transferred to private open funds but is now deposited into two different accounts (i.e., public and private). The experiments are conducted simultaneously for two variants of the pension systems, and the identical values of macroeconomic forecasts are defined as the input data. The Polish pension system was radically altered in 1999 with the establishment of a new legislative act. Previously, the defined benefit pension system was financed exclusively by employers' contributions, and the pension rate was approximately 100% of an employee's base salary. In the new defined contribution system, a pension contribution of 19.52% of earnings (split between employer and employee) is recorded for personal retirement accounts. One portion of this contribution is administered by the Social Insurance Institute (ZUS — Zakład Ubezpieczeń Społecznych), while the other portion is transferred into individual retirement accounts managed by private open pension funds (OFE — Otwarte Fundusze Emerytalne). Under this system , ZUS deposits 12.22% of an employee's salary into the public pension fund and 7.3% into a private pension fund (OFE). Under the new law, workers participate in a mixed pension system composed of public pension and private accounts. The system is also called a three-pillar system, as workers can also voluntarily contribute to a third individual retirement account. OFE funds allocate their assets primarily in the bond and stock markets. For example, on 31 December 2010, a 58.69% share of the total value of OFE's investment …