【正文】 m is crucial. For the purposes of this paper, “reform” means changing the system in order to remove tructural inefficiencies – and not just playing at the margins with contribution rates and retirement ages to adjust the system’s parameters for shortterm fiscal and political pension systems have proven to be inefficient in providing societies with social security. At the same time attempts to cure these systems are hampered by a lack of consensus on what could replace the traditional system. Discussions on this issue involve confusion stemming from the ideological context of the discussion participants, as well as from overuse of such concepts as “payasyougo” versus “funding”, or “public” versus “private”, while at the same time ignoring a number of important economic issues. Furthermore, economists have traditionally ignored pensions. Designing and running pension systems was left to noneconomists, who were not extensively concerned with how to finance pensions in the longterm or with how to counteract these pension systems’ negative externalities. The new Polish pension system belongs to very small number of successful attempts to apply modern thinking in the area of pensions. This does not mean – as some may assume – giving up social security goals. Rather, the key idea was to give up the inefficient methods of delivering social security in order to save its goals and principles. This paper consists of two parts. The first focuses on a discussion of general issues that need to be addressed when designing a pension system. These issues are presented in a way that goes beyond the traditional way of thinking on pensions. In regards to this second part of the paper, it is important to point out that most countries in the current EU member states and candidate countries have pension systems that are essentially the same at the basic policy level. As such, the solutions in one member state or candidate country can be expected to be the same. Like European states such as France, Germany, Italy, the Czech Republic, Hungary and other European states, Poland and Sweden over the past decades and until the late 1990’s developed inefficient, costly pension systems. As such, in part two of the paper we shall examine how Poland has now successfully implemented the approach presented in the first part of the paper, and created a fundamentally strong a nd neutral pension system. Selected general issues 3 Pension system design has to take into account a number of issues. Their full presentation and discussion goes beyond the scope of this paper This paper presents only a list of the issues for consideration and the most important observations. The pension system: externalities versus neutrality The description of a pension system depends strongly on both the aggregated and individual viewpoint. From the aggregated perspective, the pension system is a way of dividing current GDP between a part kept by the working generation and a part allocated to the retired generation. From the individual perspective, the pension system is a way of ine allocation over a person’s life cycle. The above holds irrespective to the technical method applied or the ideological viewpoint. The pension system – as defined above – is not necessarily payasyougo or funded. Such features stem from technical elements additionally applied on th