Thursday, 4 March 2010

Different interests, different views

There are few things as beneficial for public intercourse as an open and constructive debate, therefore I was glad to read a series of articles on Polish pension system written by more or less eminent experts and published in the latest issues of “Polityka”. The string of polemics has been triggered by the article I have mentioned repeatedly. In response to this, Jeremi Mordasewicz from Polish Employers’ Association wrote and had published another article, presenting an opposing view. In his feature, Mr Mordasewicz did not refute Prof. Oręziak’s arguments against pension funds but laid out his own ones on the advantages of OFE. Finally, last week “Polityka” printed a third article, by dr. Agnieszka Chłoń-Domińczak from my school, in which she debunks myths concerning pension system, allegedly spread by Prof. Oręziak.

Now it is time for me to crack down on those myths once again or maybe gainsay the rebuttals. There’s no time to lose, so let’s set out.

Myth #1: Developed countries have not decided to create pension funds with obligatory participation.
A.C-D.: Pension systems in most developed countries are quite complex and have pension schemes run by employers as their core.
Comment: Indeed, the systems in those countries function in a totally different way. In Anglo-Saxon countries those, whose benefits are not provided under such schemes have to fend for themselves on their own, like freelancers do. Moreover, an employer-run pension scheme has a tremendous edge over a Polish pension fund. It is small and flexible, what means that if it manages 10 million rather than 10 billion dollars, zlotys or any other currency it can easily adjust its portfolio to changing market conditions. Polish pension funds are in this comparisons like a bull in a china shop – whenever it makes a move everything around quakes. Another issue is how the future pensioners can influence the way their money is managed and if they have a variety of institutions where they can save, unlike in Poland, where we have 15 similar funds and the choice is illusory.

Myth #2: The only reason why the Social Insurance Fund is indebted is that it finances pension funds.
A.C-D.: Here Mrs Chłoń-Domińczak enumerates factors and decisions that have contributed to shortfall of money is the state-run fund.
Comment: I reread the article and didn’t find this “myth”. Puzzling…

Myth #3: The OFE-based system results in constantly growing public debt, what poses a threat to economic security of Poland
A.C-D.: As the projection prepared by European Commission says… …Poland will the country where the social costs of ageing will be the lowest.
Comment: Europe is far behind us in terms of social expenditures. In autumn 2008 I saw an advert of an investment fund, which went the following: “Stock indices fell by 50%, other funds lost even 60%, we lost only 30%”. Should an investor who has lost “only” 30% be happy, if he could earn 4% at the same time.
The biggest problem that the goal of the reform was to take the burden of providing pension benefits from the state. Under this lame system the state is still responsible for 80 per cent of the benefit, either in form of contributions to ZUS, or as the issuant of government bonds. The system should not rely on state at all and money should work on the market only. Because this is more risky, obligatory participation has to abandoned and the responsibility transferred to citizens. They know better, believe me. And if they don’t know, as Robert Gwiazdowski wrote, there’s a plenty of food on rubbish dumps. I also see a lot of bread and rolls scattered on the streets, so can we really speak about poverty if people throw away so much food?

Myth #4: State does not have to pay interest on the debt of ZUS, hence these payments will not generate budget outgoings.
A.C-D. The obligations undertaken by ZUS will have to be settled sooner or later.
Comment: It’s true: what is kept on accounts in ZUS are just book records, not real money. This Ponzi Scheme will sooner or later collapse, but issuing more bonds, when there’s no money in the budget is ridiculous and generates additional costs.

Myth #5: The state has to cut spending on health care, education, police, orphanages to finance OFE
A.C-D. (and me): What does one thing has to do with the other?

Myth #6: The current situation of public finances is more important than the stability of pension system.
A.C-D.: These priorities cannot stand at odds. The latter cannot be done at expense of the former.
Comment: The system which generates growing public debt will not increase our financial stability. The lower the debt is, the more stable Poland will be perceived and the lower the costs of debt service will be. Remember that higher public debts results in higher yields on government securities and this exacerbates country’s situation and hits taxpayers’ wallets. Prof. Marek Góra put forward that pension obligation should not be included in public debt. Thus we will not exceed the threshold of 60% (public debt to GDP ratio). This a creative accounting in essence, to make it worse this is allowed by EU regulations which leave the method of public debt calculation at states’ discretion (appallingly). And this creative accounting would allow the Polish state to issue more and more bonds.

Myth #7: Pension funds invest most of its assets in gilts so it is better to leave that money in ZUS.
A.C-D.: Gives a true explanation that bondholders will sooner get their payouts and pensioners who trusted ZUS will pay them their benefits one day.
Comment: But if pension funds can influence the price of bonds, this works badly in both ways round. If the yields are higher, pensioners will get more, but taxpayers will also pay more. If the yields are lower, pensioners will get less, but taxpayers will pay less. Only those who run the system will get their remuneration regardless of investment results.

Myth #8: Pension funds will squander financial assets of future pensioners by investing them abroad if they will be allowed to do so.
A.C-D.: As the past results show, Polish pension funds performed better than in other countries and this year they earned…
Comment: Firstly, the perform as the stock market does, for stock exchanges 2009 was an exceptionally good year, so pension funds could report good returns. Secondly, they cannot hedge the currency risk, since they are not allowed to invest in derivatives!!! Thirdly, since when financial markets guarantee high profits? All experts, not labour economists, like Mr Góra or Mrs Chłoń-Domińczak will tell you fundamentals play a minor role. Stockbrokers and bank dealers and other practitioners (I’m talking about those with academic degrees with at least PhD) will tell you financial markets are a big casino and are hardly ever driven by any rational premises. That is why I don’t want to blame a few managers for losses and be given the freedom to blame myself, not regulators who told me how to waste my money.

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