Agriculture can be freed from KRUS

An attempt at solving this gridlock has been undertaken by a team of experts who, under the Development Initiatives of the European Fund for the Development of Polish Villages, prepared reform proposals for the social insurance system for farmers. The proposals are contained in a document Reform concept for the social insurance system for farmers, co-authored by Jarosław Neneman – former Deputy Minister of Finance and currently social adviser to the President of the Republic of Poland, Mariusz Plich and Marek Zagórski.

First, some basic information about the functioning of the social insurance system for farmers. The pension system started covering farmers in the second half of the 1970s. At the beginning, the system differentiated contributions (40-fold) and benefits (4-fold). Gradually, the group of farmers covered by benefits and contributions increased. The Act on social insurance of farmers of  December 1982 broadened the scope of beneficiaries to include household members and special divisions of agricultural production.

The present legal situation is a result of the Act of December 1990 on social insurance of farmers; which, among others, provided for the creation of the Agricultural Social Insurance Fund (Kasa Rolniczego Ubezpieczenia Społecznego, KRUS). Contributions and benefits were harmonised, and persons employed in two places who are insured in the Social Insurance Institution (Zakład Ubezpieczeń Społecznych, ZUS) were excluded from KRUS. However, the Act provided for extending KRUS insurance to persons who own an agricultural holding (usually a small one) and receive income from copyright.

The 1999 pension reform in Poland, which created a system based on individual pension accounts, did not cover – for political reasons – the pension insurance system for farmers. Thus, presently Poland has two completely independent systems of pension insurance:

• National health insurance system (ZUS and PTEs [ZUS and Pension fund management companies), which is to become ultimately a defined-contribution system where the benefit level depends solely on the capital gathered and the expected period of drawing the benefit,

• Agricultural insurance system (KRUS), which is a defined-benefit system where the benefit level hardly depends on the sum of contributions made to the system.

In 2010, only 9.3% of the almost 16.5 million insured persons were covered with KRUS. However, KRUS pays a number of benefits that is disproportionate to the number of insured persons: out of the general number of beneficiaries – over 9 million – KRUS accounted for almost 15.3%. Also the subsidy to KRUS is disproportionately high in comparison to the number of insured persons and beneficiaries. In 2012, subsidies to the Social Insurance Fund (Fundusz Ubezpieczeń Społecznych) are expected to amount to 48.3 billion PLN, including 8.4 billion PLN in transfers to OFEs (Otwarty Fundusz Emerytalny, Open-end Pension Fund). In the 2013 budget, the planned amounts are 48.4 billion PLN and 11.3 billion PLN, respectively.

The 2012 subsidy to KRUS, in turn, amounted to 15.6 billion PLN, and the one planned for 2013 is 15.9 billion PLN. It means that in 2012, 24.3% of social insurance subsidies was assigned to agricultural benefits, and in 2013 – 24.7%.

Per capita (beneficiary), the state subsidy is ca. 11.5 thousand PLN in KRUS and 2.9 thousand PLN in ZUS.

Since 1 October 2009, the level of contribution has been made conditional on the size of the farm.  However, an increased rate is not connected with a higher benefit.

Farmers who additionally carry out economic activity and whose due tax does not exceed 2,528 PLN annually, pay double base rate, and pay additional contribution according to the same rules as other farmers. Double rate is also paid by household members carrying out economic activity. The level of KRUS benefits is calculated according to the rule of defined benefit and is minimally related to the contributions paid in.

The system does not encourage the prolongation of contributory period. With much lower contributions, farmers receive relatively higher benefits. In 2011, a farmer retiring at the age of 65 after 45 years of work received a pension in the amount of 947 PLN. However, according to the actuarial value of gathered contributions (with the assumed return rate of 2%), the benefit should amount only to 280 PLN.

The preferential system of social insurance for farmers is a deviation from the rule of uniform treatment of all citizens. Its introduction and the unchanged character for over 20 years after the transformation results from the political power of beneficiaries. Low profitability of this sector of the economy, resulting from its low productivity, is also an argument in favour of maintaining preferential solutions for agriculture.

This, however, is a two-edged argument. If agriculture’s profitability is low, farmers should be encouraged to transit to extra-agricultural sectors. However, the preferential treatment of agriculture in the taxation and social insurance – i.e., being subsidised by extra-agricultural sectors – discourages farmers from legal search for other sources of income.

An attempt at solving this gridlock has been undertaken by a team of experts who, under the Development Initiatives of the European Fund for the Development of Polish Villages, prepared reform proposals for the social insurance system for farmers. The proposals are contained in a document Reform concept for the social insurance system for farmers.

The authors Jarosław Neneman, Mariusz Plich and Marek Zagórski put forward a diversified system of insurance for three groups of farmers who can be generally described as “poor”, “medium” and “rich”. The authors do not define the groups, stating only that borders between them can be delineated on the basis of income (which they deem a better solution) or the size of land parcels.

For the calculations, an initial assumption was that the border between the first and the second group would be the income of 18 thousand PLN annually (1,500 monthly), and between the second and the third – 144 thousand PLN annually (12,000 PLN monthly). A farmer would pay additional contribution on the surplus; the contribution would be calculated on a linear basis.

The authors also propose that in the framework of the reform, the KRUS system should be tightened up. The preferential system of social insurance should cover only farmers with low or medium income. The opportunity to insure persons who have agricultural holdings and income from liberal professions (including from copyright) would be eliminated. The preferential system would be voluntary, which means that farmers with low income could move to the general system if they believed that for some reason it would be more beneficial for them.

The level of benefits in individual groups would be diversified, so that farmers in the same age and with the same number of years of work would have higher benefits if their contributions had been higher and paid ifor a longer time.

This concept should be supplemented with incentives discouraging young persons from taking up small and medium-sized agricultural holdings and encouraging the consolidation of farms. The introduction of income tax in agriculture would be an additional advantage.

Such proposals are not met with enthusiasm in rural areas, but the maintenance of the present solutions has been increasingly costly and difficult to justify.

OF