Pension system overhaul - follow-up

The topic of pension system reform, my hobby horse, will be keeping us company in the coming weeks. The final decision on the future shape of the pension system in Poland is bound to be taken and announced around the end of summer holidays. Until then several consultations will be run in order to work out compromise on the variant which will be chosen and pursued. Meetings have kicked off and judging by what politicians and government-related economists declare, we are drifting towards the second option, i.e. freedom to choose whether to still transfer part of pension contribution which now goes to private-run pension funds there or to move it to state-run social security fund.

A week ago I mentioned the calculations presented in the government report, whose accuracy has been called into question by independent (?) economists. I took the trouble to download calculations presented by independent economists (in a spreadsheet) and set about analysing them. I can only agree with independent economists that money-weighted rate of return (actually in essence internal rate of return) is a proper and more accurate tool for assessing investment performance that geometric mean. I spent some half an hour poring over the complicated spreadsheet to work out why specific formulas are in specific cells and find causations between them. Then I began to verify assumptions on which calculation had been made. I found a factual error in decreasing fees charged by pension fund managers (not impacting substantially the upshots), but then gave up on further exploration as it was before eleven, it was dark and my mind simply began to drift away. Had I spent one more evening doing all the stuff, I would have probably been able to tell whether the independent economists’ calculations were correct. Third evening for verification of government’s calculations and I would have been home. But in the first week of July when weather is perfect, there are much more interesting things to do than taking apart the report, if it is not going to change anything…

The silver-mouthed politician of the week award goes to Leszek Miller, chief(tain) of SLD. On Tuesday in the public radio he put forward calling parliamentary investigating committee to track and bring to the light irregularities in setting up and running pension funds. Having read the transcript of the interview I can say that:

1) There is no need to call any committee to find out pension fund managing companies charged over 17 billion PLN in fees from contributions paid by future pensioners. They did it within the letter of law (because politicians allowed them to do so), extensive reports on profitability and solvency of pension fund industry are available on Polish Financial Services Authority’s website and everyone (computer-literate) can easily find the numbers,

2) Personal tie-ups of reform-authors with beneficiaries of the reform are disclosed to the public. You may speak here about arrogance, lack of integrity, but not of withheld tie-ups.

3) If indeed it is true that powerful financial corporations lobbied for the reform to secure for themselves risk-free business, they surely did not spare efforts to efface all the traces of what could be found illegal and the committee would not be able to track it.

4) If Leszek Miller suggests pension fund managers were “pumping up” prices of some shares and there were investors in the know of it and benefited from this and he has evidence of such incidents, may he go to relevant supervision authorities. What Mr Miller speaks of is an example of insider trading, which is a (n easy to detect, difficult to prove) crime. Bodies which deal with such form if criminality in Poland are Financial Services Authority (KNF) and Prosecutor’s Office.

On Friday Mr Miller announced his grouping would pass a resolution condemning bygone prime minister Jerzy Buzek and bygone finance minister Leszek Balcerowicz for the pension reform. I know there are thousands or even millions of people in this country deeply convinced pension system reform, in particular creating pension funds, was the biggest scam made in Poland after 1989. Mr Miller also knows it (just as he knows there are millions of Poles hankering after Gierek’s decade) and in his cynical game wants to score a point by speaking out what those people have in minds. I shall refrain from explicit comments, this is pure politics, not policy, something that adds no value to moving Poland forward.

On Tuesday the runner-up, Jarosław Gowin reasserted he thinks “in pension funds there are Poles’ private monies” and insisted in case pension funds are scrapped, it would be best to give that money back to Poles (incidentally Mr Gowin failed to pin down what he actually meant). Last week I outlined a scenario of freeing the assets accumulated in pension funds, this week I will just paste a fictitious news item, thought out by me and posted on my wall on facebook – dedicated to philosopher Gowin.

It does not take a lawyer, nor the Supreme Court ruling, to come to the conclusion public pension fund assets are not private savings, it is a matter of logic, you just need to use your brains.

The conclusions I reached after the last week are depressing. An average Pole knows little of economics. Loads of useless stuff are taught at schools and except for short course of “entrepreneurship” run in high schools, youngsters in Poland are not educated in the workings of economy. I estimate 80% of Poles do not understand what the whose fuss about OFE is about and hence are pliable - one day can believe the government, the other they will believe Mr Balcerowicz is right. Due to lack of education they have to take what they are told on trust. Imagine how much room for misrepresentations, manipulations, populism and propaganda it leaves.

Politicians and journalists also lack proper knowledge and understanding of the topic. Let’s take the example of a sentence “oszczędzać na emeryturę w ZUS-ie”, in English ‘to save for pension in [state-run] Social Security Fund’, literally in “Social Insurance Company”. Stare-run pillar of the pension system is an insurance scheme. When you work you pay contributions and in fact take out insurance from not having subsistence when you retire. It is an example of endowment insurance policy with no payout before maturity. Get it? If not imagine you take out non-compulsory car insurance. If your car is not damaged, nor stolen, has the insurance stolen your premium. In state-run pension system you buy protection, not benefit. Had it been the other way round, the system would have collapsed, or contributions would have been raised.

The other story is poor informational quality lack of clarity in public speaking. This drawback of Polish public discourse is partly the effect of poor understanding of complicated issues. The other, very rare ability most public figures lack, is the aptitude to explain complex issue in simple words, intelligible for an ordinary recipient. Even if somebody has knowledge, difficulties in putting it across make it useless for the society!

Now let’s move a level higher. Imagine the recipient is an educated graduate of economics, who not just holds a diploma, but is familiar with the stuff and avidly interested in it. If such person needs some six hours (maybe it is little) to determine whether rates of return in the report were correctly calculated, does the whole debate not move to another universe, completely out of reach for ordinary people? Should an average citizen know whether geometric mean, or money-weighted rate of return is apposite for comparing investment results? Does this give politicians and economists right to deprive benighted people of the right to decide how to secure their retirement? Thus I moved to the realm of questions doomed to be unanswered which reminds me today’s writing has come to an end.