Thursday, 28 January 2010

Articles, opinion, views

At the beginning of the current year I initiated a new “secular tradition” – I began placing links to the articles I find of note in my profile on facebook, leaving room for comments to the readers and reducing my role to suggesting something would make a good read.

Today, exceptionally, I’ll do it on the blog. This time notable articles for Polish readers. Those to which I’m linking today prove best the true pluralism of press and that every opinion, not necessarily from the mainstream may break through.

Firstly, two articles for the readers interested in the problems and evaluation of Polish transition from central-planned to market economy. One voice for, another against, both make a good summary of the current public debate on the reforms implemented by Balcerowicz.

And secondly, the article “Zlikwidować OFE” (EN: Let’s scrap the pension funds”) by prof. Oręziak from my school, so maybe once again flogging a dead horse. This issue will have be raised repeatedly, until the problem is solved, because our reform does not appear to be the great success, as its authors claim.

This problem has been tackled earlier, click the label ‘OFE’ or ‘pension system’ to read my previous posts. They form a coherent series of features in which I pounce on the Polish pension system and suggest changes.

The article is not available online (why?), you have to buy a paper issue of this week’s “Polityka” to read it. I’ll comment on some diagnoses and proposals it contains.

“Most developed countries have given up on an idea to create pension funds with obligatory participation. They did it for two reasons: firstly they were reluctant to take away loads of money from public sector, secondly they didn’t want to expose future pensioners to the risks of financial crises and inflation.” The second argument is flawed, the state sector doesn’t really protect the money well, but the first one lays bare the bleak truth – public finances lose on the pension deal and if the public sector loses, the taxpayers will sooner or later have to pay for it.

“The OFE-based system continually generates growing public debt”. Sad, but true, the current government identified this perpetual flaw, but the influential economists have torn the politicians to pieces. The soundest proposal of labour and social policy ministry was to forbid investments in government bonds. Now pension funds are obliged to invest at least sixty per cent of the assets they manage in gilts. My views of public debt are quite extreme – I would welcome a balanced deficit. Firstly, because state should be lean, secondly, because it should not support financial markets. Offering government bonds to the market means offering to investors theoretically risk-free securities at taxpayers’ cost – if my neighbour buys government bonds and the interest is paid from my taxes it’s an unfair redistribution. Financial markets and governments (and monetary authorities) should have as little in common as possible.

One of the goals of the pension system reform was to take away the responsibility for pension benefits from the state. And the outcome is a travesty. The government bonds make up sixty per cent of pension funds’ portfolios. Moreover, state has to pay interest on this debt, unlike in patchy ZUS. So the main entity responsible for providing benefits remained the same, only the costs are higher. Once because of the interest mentioned above and later because of remuneration for fund managers. This is the next pathology, from January 2010 its scale was reduced by half. No regulations that would link management fees to investment results have not been put forward.

Mrs Oręziak slates the idea to allow pension funds to invest money in risky securities and lift the limitation in their investment policies. This move is right when it is accompanied by giving more freedom to future pensioners. They should, like in Sweden, have a big choice of institutions where they could save money for pension. They should include banks, insurance companies, various investment funds. Under such conditions they choice of ways of saving would offer many alternatives and would enforce competition based on (real!) free market rules. Under such a system the current pension funds with their effectiveness and costs would be wiped out!

And the last proposal, namely to transfer the money kept currently in pension funds to ZUS. It’s not the right solution. ZUS is not a quick fix, this ponzi scheme will sooner or later collapse under the burden of demographic changes. Let’s face the truth – the state will not be able to provide us with a decent pension benefit. If so, may it give us the freedom to save on our own, we know better what to do with our money.

In the last sentence, Mrs Oręziak brings up the burning issue of the expert who speak about pension system reforms in the media. One of these persons is Prof. Marek Góra, also from my school. He’s the main architect of the reform and keeps digging his heels in and defending the reform. He has some reasons, not only creator’s honour, but also a cushy job in ING pension company’s supervisory board. A conflict of interest?

Demography is only one side of coin, though it prompted changes in pension system. The overall idea of new system was good, only the solutions put into practice are lame. The bigger problems are the laziness of Poles, whose retirement age is the lowest in the EU and the untouchable – miners, policemen and also pension fund managers and shareholders… Instead of doing millions of Poles out of their hard-gained money, deprive the privileged groups of undeserved advantages!

UPDATE, 31 January 2010. a brilliant post on the same topic by Robert Gwiazdowski (in Polish)


Island1 said...

I just noticed we're off your blog list. Was it something I said?

Island1 said...

No we aren't. Ignore me, I'm a fool.