Pension reforms over the past three decades have sought to strengthen the connection between social security contributions during working life and the benefits received in retirement. This approach aims to encourage employment and extend working lives, while reducing fiscal pressures on ageing pension systems. The 1999 Polish pension reform, which replaced a traditional defined benefit (DB) system with a notional defined contribution (NDC) system, provides a case study on how such reforms affect labour supply.
The reform in Poland created a clear cohort distinction: individuals born after 31 December 1948 entered the NDC system, while older cohorts remained under the DB rules. This allowed researchers to study the effect of future pension incentives on employment long before retirement. Under the DB system, benefits were heavily concentrated in an individual’s highest-earning years, typically in their 50s, providing strong late-career work incentives. The NDC system, by contrast, spread benefits proportionally across all working years, creating earlier but weaker incentives where labour supply is less responsive.
Using administrative tax records, the study found that employment among men aged 51–54 declined by 1–1.5 percentage points in regions where the reform significantly reduced late-career pension incentives. This corresponds to a 2–3% relative decline in employment and implies a labour supply elasticity of roughly 0.5 with respect to pension-related work incentives. The findings indicate that individuals respond meaningfully to future pension incentives, almost as strongly as to immediate financial incentives, even when retirement is more than a decade away.
A lifecycle analysis showed that while the NDC system strengthens incentives at younger ages, the weaker late-career incentives reduce total lifetime labour supply. Gains from increased employment among younger workers were smaller than losses among older workers, resulting in an overall reduction in lifetime employment of approximately two months per worker. This highlights the importance of timing when designing pension incentives.
The broader implications of the study suggest that pension design must carefully consider lifecycle labour supply patterns. While strengthening the link between contributions and benefits encourages forward-looking behaviour, shifting incentives away from ages when workers are most responsive can unintentionally lower overall labour supply. Additionally, pension reforms have indirect fiscal effects, as changes in employment influence contribution revenues and economic activity over time. As countries continue to adjust pension systems to meet demographic challenges, understanding how incentives interact with employment decisions across the lifecycle remains crucial.
