With the fall of communism in 1989, Poland began the long road of liberalizing the economy, privatizing bankrupt state-owned companies, and rationalizing the functioning of a decrepit socialist state. Stores filled up, unemployment dropped, and the Polish currency, the zloty, rose to levels not seen since the start of World War II. But the reforms were incomplete. The pay-as-you-go pension system was broken. Poland needed “the mother of all reforms,” a capitalization system for pensions.

​

In 1991, the president of the Social Insurance Institute, Wojciech Topinski, contacted José Piñera, creator of the capitalization pension system in Chile, to learn about and draw from this pioneering experience. He even traveled to Santiago to meet with the Chilean reformer and understand how the system worked on the ground.

 

Upon his return, Topinski gave the president of Poland, Lech Wałęsa, the book “El Cascabel al Gato,” specially dedicated by José Piñera to the hero of Gdańsk, a book that describes the epic of pension reform in that country.

​

Andrzej Sadowski, a young lawyer who had organized the first student centers that fought against the communist regime, founded in 1989 in Warsaw the Adam Smith Research Center, a think tank to promote ideas of economic freedom, which became the most influential center of thought on freedom in Poland. Sadowski immediately understood that introducing capitalization was what Poland needed to break with the communist legacy and consolidate the nascent free-market economy.

​

It was a summer day, June 8, 1995, at a Convention Center located in the heart of the historic Royal District, when I had my first opportunity to see José Piñera in action. That day, he was the keynote speaker at a conference organized by the Adam Smith Center titled “Pension Reform: A Prerequisite for Growth.” In a passionate speech, he emphasized the concept of individual capitalization of savings that are invested in the economy and increase growth, generating a virtuous circle that benefits everyone. He showed his own savings booklet to highlight that individual capitalization turns workers into small capitalists, benefiting them over the years with the enormous power of compound interest.

​

The impact of this conference was so great that the Adam Smith Center translated into Polish the book “El Cascabel al Gato: la batalla por la reforma del sistema de pensiones” under the title Bez (“Now”). In the book, José Piñera explains in detail how the system was created, facing powerful vested interests, to free Chileans from the injustices and arbitrariness of the state in pension matters. And to create a new world that gave every Chilean the opportunity to capitalize their own savings for old age, taking advantage of the power of compound interest in the long term. Professor Władysław Wilczyński, who presented the book, concluded: “we should learn from the Chileans.”

​

The influence of José Piñera’s writings and presentations in Poland was decisive in leading the Ministry of Labor to form a group tasked with proposing a pension reform inspired by the Chilean system. In 1998, with input from the Adam Smith Center, this team presented to the Polish Congress a pension reform bill. On April 1, 1999 marked the day when Polish workers placed their first savings into the new capitalization system.

​

The introduction in Poland of the capitalization system allowed Polish workers to save in individual accounts managed by specialized private companies. In this way, workers benefit from the returns on investments made by 19 fund administrators, most of them in partnership with foreign investors.

​

The reform established that workers under 30 years old had to join the capitalization system; workers between 30 and 50 years old could choose to switch to the new system or remain in the state pay-as-you-go system, and those over 50 had to stay in the old system. Before the reform, the payroll tax was 45% of wages. After the reform, 7.3% of wages became a contribution to each worker’s individual savings account, and the contribution to the old system dropped to 29.7%. By 2005, out of a total of 13 million eligible workers, 11.6 million had opted for the new capitalization system.

​

In its early years, the capitalization system generated real annual returns of 7%, impressive for an economy that was just recovering from the communist onslaught. The system freed workers from the arbitrariness of politicians and the corruption of the pay-as-you-go system, and created a direct link between contributions and benefits.

​

The new system boosted the capital market, which modernized to meet the high investment standards of the capitalization system administrators. It also forced improvements in the quality of state regulation of securities markets, which enabled an unprecedented expansion of the capital market that facilitated its integration with that of the European Union, which Poland joined in 2004.

​

It also accelerated the privatization of state-owned companies and encouraged the expansion of private companies that now had access to financing from Polish workers themselves, in an extraordinary symbiosis that benefited all of Poland.

​

Until 2014, when it was weakened for political reasons, the capitalization system had driven Poland’s development, collaborated in Poland’s transition to a market economy and a free society, and benefited its workers.