"Katastrofa emerytalna..." - book review

Imagine an economic system 18^th-century liberal economist Adam Smith called for. Imagine a state which serves only as a night watchman, i.e. secures law and order, sets regulations and enforces observances of law and leaves all other aspects of social and economic life in hands of citizens and the invisible hand of free market. A mind-bending picture? No wonder, post-WW2 societies have become so accustomed to governments’ interferences into social and economic interactions that any attempt to whittle down the scope of government’s tasks would trigger hue and cry among spoilt populace…

Despite this, still there are niche associations that advocate idea of lean state and returning to traditions of classical economics. The most important such organisation in Poland is Centrum im. Adama Smitha, headed currently by Mr Robert Gwiazdowski. This ultra-liberal think tank which espouses ideas of lean state, low taxes and deregulation, from the very beginning of the pension reform in late 1990s was against compulsory participation in private-run pension funds… The profound justification of the think-tank’s stance is comprehensively explicated in a book released last year, titled “Katastrofa emerytalna i jak się chronić się przed jej skutkami”, literally: “The pension calamity and how to shun its aftermaths”.

Bemused? You thought if the free-market campaigner, Mr Balcerowicz fiercely defends private entities facilitating the pension reform, each free market believer should support private-run pension funds? Well, life’s a bit more complicated. And Mr Gwiazdowski can tell you why!

What’s your first association when you think of free market and capitalism. Words that come first to my mind are freedom and responsibility, but because those two rarely go together these days, Mr Gwiazdowski claims an average citizen when he thinks of capitalism has in mind huge investment banks, too big to fail, bailed out by governments in 2008 and free market is for him a game similar to tossing a coin: head – I win, tails – you lose. In fact this is how the economies work now and, as Mr Gwiazdowski rightly notices, those to blame are politicians, who have given financial sector freedom, but have failed to require responsibility in return. The current economic system is a blend of free market mechanisms and socialism, an upshot of decades of attempts of combining security citizens want from the government with market mechanisms which in economic theory should allocates resources most efficiently. Mr Gwiazdowski claims as you cannot mix up water and fire, there is no point in building in market mechanisms to socialist solutions. Such actions only lead to expansion of socialism and its further distortions… Conclusion? If a society requires a certain level of security from the state, the state should provide them with such “bare minimum” in the most simple way and refrain from improving anything by harnessing free market mechanisms or private sector.

At least for this very reason privatisation part of pension system in Poland was doomed to fail from the very beginning. If at the end of the day how high the pensions will be depend, apart from demographic trends and labour ratio, on general performance of the Polish economy as it underlies both stock market performance and solvency of government as sovereign debt issuer, does it make sense to put in private sector entities and entrust (and pay) them managing assets whose value in the long term will not rise much above GDP growth rate? And after all, is it possible and fair to encumber one generation with a burden of paying for current pensioners’ benefits and at the same time saving for their own pensions, if the only beneficiary of such shift would be the last generation living on earth and knowing about the oncoming doomsday?

For all those less familiar with pension system and its origins, Mr Gwiazdowski delineates a chronicle of insurance and social security schemes. This introduction helps a reader realise the pension system has a form of insurance protecting from the risk of old age and disability to work. Shift towards obligatory pension savings is an experiment then…

Mr Gwiazdowski points out the Polish pension system is full of absurdities and generally has a built-in inability to generate decent pension benefits. Ludicrous are the workings of state-run ZUS, that costs each year taxpayers over three billion zlotys, or 3 percent of paid contributions (compared to 3.5% charged by private pension funds). If you are curious what the load of money is spent on, Mr Gwiazdowski quotes a list of tasks of the ZUS that occupies several pages of the book – the purpose of author was not to bore a reader to death by enumerating what the social security system administrator has to do, but to give the feeling of how bloated the state sector is. Given the multitude of tasks ZUS must carry out, hundreds of clerks the institutions employs should not sit on their hands! Some of the tasks are truly ridiculous and expenses incurred for them totalled to billions of zlotys, such as the system for administering the pension reform which inter alia serviced transfers to pension funds and calculated so called kapitał początkowy (starter capital), an imaginary amount of paid contributions which then influenced pension amount.

Pension funds and their defenders are given a proper belting. Stability of safety of the private-run part of the pension system is called into question. Look just at the numbers, more up-to-date, from the government’s recent review. If assets under management totalled to 270 billion zloty at the end of 2012, and aggregate equity + guarantee fund totalled to 4.5 billion zloty, it means on average the safety valve covers 1.7% of assets amassed in pension funds. Lehman Brothers just ahead of its collapse had lower leverage! In the meantime owners of pension fund management companies paid out 4.2 billion zloty in dividends. In fact profits have been sucked out of Poland and in case something goes wrong, the private pension fund manager loses its equity (3.4 billion zloty, the rest is in the guarantee fund), liquidates the profit-making business and its responsibility ends. Responsibility for benefit payments rests then with the state or, let’s face it, taxpayers. Profits – privatised, losses – socialised! Please note with time the ratio of pension fund managers’ equity to assets under management will only rise, as assets will grow faster than equity, each year depleted by generous dividend payouts.

Pension fund supporters have a separate chapter dedicated to them (“Wojna o OFE…”). Their ferocity is best described by sentence “Profesor Balcerowicz zachowywał się, jakby OFE były najważniejszą rzeczą na świecie, a poza OFE życie na istniało w ogóle” (Professor Balcerowicz acted, as if pension funds were the most important thing in the universe and life without them did not exist). In all developed countries private institutions do not run obligatory pension schemes and life goes on despite this, but this is not the case. I recommend reading of this chapter, as Mr Gwiazdowski does in it what I called for – quotes specific statements of OFE defenders and then disproves them. Instead of shouting with angry face and talking of distortions and manipulations just like Mr Balcerowicz does, Mr Gwiazdowski puts under microscope each single myth on pension system and debunks it. You an argue with his reasoning, but can’t deny him precision and clarity.

The final question Mr Gwiazdowski asks is – if pension funds are as good as their defenders assert, why is participation to them obligatory? The true virtue will always defend itself! In fact Mr Balcerowicz, who refuses to give people freedom whether to choose to rely on state-run social security system, or to trust private sector asset managers, treats people like idiots (barany), not the government.

In the last chapters the author lays out the concept of the ‘civic pension’, a pension scheme similar to the one in Canada. The ideal pension system in Mr Gwiazdowski’s opinion should be as simple as possible – not to generate unnecessary costs for taxpayers, guarantee subsistence allowance, leaving any initiative to save for or insure against pension in citizens’ hands, and… be funded directly from taxes… Then he casually muses about workings of the state and advises how to save for pension on our own.

For my part, the book is:

- deftly and brightly written (I noticed some complication of Mr Gwiazdowski’s blog posts),
- could do with some more thorough editing, as spelling and other minor, easily discernible errors have not been eliminated,
- biased, but this not an academic publication, but expresses private judgments of its author (probably therefore strikes a chord with me),
- thought-provoking and compels a reader to think over how a variety of pension system solutions work, what their advantages and drawbacks are and which of them can be eliminated.

All in all – a recommended read, particularly less than a month before final settlement on the shape of pension system in Poland.