【正文】 proaches – and the lessons and results are promising for all OECD countries. This paper presents the theoretical and practical application of this alternative approach and as such, the key features of the new Polish pension system design. Introduction Demographic transition together with myopic policies has caused severe problems in the area of pensions in many countries around the world. Elements of traditional pension systems’ design include a weak link of benefits to contributions and the lack of control over costs of the system. Inclusion of these elements in the pension system design led to the explosion of costs, caused negative externalities for growth and contributed to persistently high unemployment. As such, the quest for pension reform is now on the top of policy agendas around the world, and especially 2 in Europe. However, very few countries have been able to introduce fundamental reforms in the area of pensions to this time. In this case, the definition of reform 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 s