The pension debate - part 1

During the first year of blogging Polish pension system was a frequent subject matter on this blog. Over a year ago I wrote the last post on the issue, as I realised merely writing would get me nowhere. The topic of pension funds and pension reform returned in the second half of 2010 and its presence in the public discourse was spurred only by deteriorating state of public finances. Unfortunately it was the main reason, nobody thought about looking into the up- and downsides of the reform, long due for an overhaul…

If you are not familiar with the topic, please catch up by reading my previous posts. I have not changed my opinions since then, today’s and tomorrow’s piece are just a follow-up. The most comprehensive, yet brief drill-down into the workings of the Polish pension system can be found here!

The proposed changes in the pension system, i.e. cutting contribution to pension funds from 7.3% to 2.3% of a salary and transferring it into state-run ZUS, where it will be booked in separate accounts, revaluated (rates of revaluation will depend on GDP growth and inflation rates) and inherited, has given rise to a big, nation-wide debate. The biggest benefit of the debate is that it has been generally substantive and has touched the issue very important for almost every Pole (unlike the cross or Smolensk squabbling). The biggest drawback of it is that after all it comes down to insults, trading accusations and some of those who cry out loudly in defence of the current system are lobbyists… Once I was glad several articles were written, several discussions were led, but now I begin to be sick and tired of the whole pension debate. Probably mostly because any party can be proved right and arguments of both parties can be easily refuted.

Main advocates of the reform are: the government backed by parties from the ruling coalition and some economists, e.g. Andrzej Bratkowski, Jan Krzysztof Bielecki, Bogusław Grabowski, some of them have tie-ups with the government.

Main defenders of the current system are: Leszek Balcerowicz (architect of the transition into market economy who saw through the reform in late 1990s), Krzysztof Rybiński (formally a lecturer at my school, in practice during his career he delivered one dull lecture, currently trying to put in as many appearances in the media as possible), Pension Fund Managing Companies Chamber (the member of the organisation are companies which run pension funds, hereinafter PTE) and business organisations, members to which PTEs are. The two last have a vested interest in the status quo, because the current pension regulations secure their huge revenues.

The arguments of both parties to the dispute were best laid out in a debate which took place on 21 March 2011 and was broadcast in TV. It has to be said that the debate should have been held earlier. On 25 March the new pension law which diverts a bigger part of pension contribution to state-run ZUS was passed in the lower house of the parliament, soon it will be passed by the upper house and will await the president’s signature. It was agreed that the advocates of the amendment would be represented by finance minister Jan Vincent Rostowski and defenders of pension funds would be represented by Leszek Balcerowicz. The former was to convince the voters they would benefit from the reform, the latter was to debunk myths spread by the government.

Below the coverage of the debate. Starring: JR (finance minister), LB (Mr Balcerowicz), me (Student SGH, butting in waspish comments).

Issue 1: whose money is in pension funds?

LB rejects the socialist view that everything is state-owned. He points out socialism has gone bankrupt, hence savings in pension funds belong to people who pay money there.

JR refutes the assertions of his opponent by citing ruling of the Supreme Court and articles 29 and 67 of the Polish constitution which all clearly state the assets in pension funds belong to the state.

Me: LB’s disquisition was just manifestation of what he wanted it to be, JR delineated the actual state of affairs. Under the law assets in pension funds are not owned by future retirees, as they cannot be cashed in, withdrawn from the funds, future pensioners have no influence on investment policies and are compelled to pay contribution. On the top of that the state can, at any time, take these assets and do with them whatever it wants…

JR: Transfers to pension funds generate public debt. This happens because sum of contributions paid to state-run ZUS is lower than sum of benefits paid to current pensioners. The state has to issue bonds to cover this gap and bonds are bought by pension funds (government securities have to make up at least 60% of pension funds’ portfolios). The same money should be transferred to ZUS and bring down state’s borrowing needs and an expensive intermediary (pension funds) would be omitted.

LB: Transferring money to pension funds creates savings.

JR: The mechanics created in the pension system is idiotic, because we have to take out a loan to put the money on a deposit, which does not make sense.

Me: JR is in my opinion right.

Issue 2: Pension reform from 1999 was not to increase pensions, but to decrease it.

Me: Yes, this was unavoidable! Now let’s forget about promises of retirement on tropical islands by which PTEs pooled wool over Poles’ eyes 12 years ago. Pension benefits have to be lower to avoid economic disaster, but setting up pension funds with a view to increase benefits was another disaster. Reforming state-run ZUS, by turning it into institution guaranteeing very low pension in the amount based on sum of paid contributions would be enough.

JR agrees the reform was a success in 80%. Reformed ZUS and pension funds buying stocks are good, pension funds buying bonds are bad, because they create huge indebtedness.

Me: I generally agree with that concept

LB repeats the argument about savings and says pro-development expenses should not be cut.

JR asks how purchase of bonds by pension funds can be categorised as pro-development expense.

LB counter-attacks by asking on the basis of which academic paper JR formulates such hypothesis, but fails to justify why the mechanism criticised by JR is proper.

Me: I have to say I am not particularly well-educated, because I have not found any academic paper in which author justified taking a loan at higher interest rate to put money on a deposit with a lower interest rate. Sometimes common sense means much more than authorities’ opinions.

LB calls on raising retirement age, curbing privileges for farmers, judges, policemen, miners, etc.

Me: I think everyone should decide on their own when to retire. A 55-year-old man, seeing his pension would be low, would decide to soldier on, or give up his job and fall back on his private savings and I wholeheartedly agree with other remarks – pension system has to be reformed and privileges have to be scrapped, just as obligatory payments to pension funds. Other reforms also have to be carried out.

LB: Pension funds finance innovations and investments in the economy.

JR: How purchase of bonds and finance innovations? (LB fails to respond).

To be continued tomorrow…