Five weeks after the general shape of the pension reform was unveiled, the government made public the document which might become the new legal act governing the pension system in Poland. The document is available here, is 47 pages long and… I have taken the trouble to read through it quite carefully.
The text is a compilation of amendments into several other legal acts regulating workings of pension funds, social security system and public finances. For this very reason is it absolutely unreadable for an average reader. In other words, just like most official documents in Poland, the document is a piece of anything, but informative twaddle, whose authors probably have not intended to confuse recipients, but have done so…
May the first article of the draft law give you the flavour of how reader-unfriendly it is:
Art. 1. W ustawie z dnia 26 lipca 1991 r. o podatku dochodowym od osób fizycznych (Dz. U.
z 2012 r. poz.361, z późn. zm. 2)) wprowadza się następujące zmiany:
1) w art. 30:
a) w ust. 1 dodaje się pkt 14 w brzmieniu:
„14) od kwoty wypłat...
Okay, I concede this incongruous form has to be retained for legislative purposes, but a reader who comes across such stipulations, unless equipped with several other acts, has no idea what the paragraph is referring to. My proposal of best practices in such instances is to attach to a draft of new law all other legal acts it changes in “track changes” version. For those unfamiliar with such methods – a “track changes” document marks what has been added, removed and changed – very convenient for readers who need to opine changes or simply quickly find out what has been amended.
The other thing I noticed (not necessarily rightly, as at second glance, I spotted a paragraph setting forth framework for settlements between pillars of the pension system, to be governed by a separate decree) is a potential cock-up regarding the 10-year period before retirement when “money” should gradually flow between pension funds and state-run social security fund. The law states 10 years before planned retirement the social security fund informs a pension fund (to be precise a company which manages it, on its behalf) about the obligation to redeem settlement units amassed by a pension fund participant and transfer money to the social security fund. The capital assigned to a fund participant is divided into 120 equal parts, then 1/120 of all settlement units a pension fund participant has is transferred each month. Amounts of transfer will vary depending on current market valuation of settlement units (i.e. underlying assets). For the whole operation to hold water mathematically, new contributions must not be transferred to pension funds over 10 last years before retirement. Otherwise the moment an employee retires, they would still hold in the pension fund account assigned to them all contributions transferred there over last 10 years, while the government’s intent was to bring the balance of pension fund account to zero.
Contrary to original plans, the choice between private- and state-run parts of the system will not be irrevocable. The decision taken in 2Q2014 might be changed in 2016 and then in 4-year intervals. On one hand this offers additional choice to future pensioners, which is an upside, on the other I fear this option will not work for the benefit of the would-be retirees. 4-year period does not offer enough flexibility for those who would like to benefit from long-term trends on stock market (75% of assets will have to be invested in shares of publicly traded companies), while given the retrospective approach to results of pension funds, many people might choose to transfer their contribution there after a period of substantial rallies (seeing high past returns), just before the oncoming bear market. In the long run this solution is quite likely to incur losses to future pensioners and discourage them from participating in private-managed pillar of the pension system. Maybe the ‘revocable freedom to choose’ has been a deliberate step towards scrapping private-run pension funds at all?
When laying out the blueprint of the reform, government had declared in case of moving government bonds from pension funds to social security fund and writing them off, debt-to-GDP safety levels would be decreased accordingly to reflect drop in official government debt (not to give room for extra indebtedness). As the draft law shows, this avowal has vanished into their air. The law brings forth only amendments to so-called ‘expenditure rule’ which would now be more restrictive in containing unfettered growth of government spending, but 50% and 55% debt-to-GDP levels, serving as a safety valve against reckless politicians, will, unfortunately, be intact.
One of more meaningful changes for future pensioners who will decide to have part of their contribution transferred to pension funds is a decrease of load fee from 3.50% to 1.75%. Slashing the commission charged at each paid zloty means higher pension benefits for system participants and undermines risk-free business of fund managers. Noteworthy is to observe pension fund defenders stance on the reduction. When interviewed, they assert this is a fine move, long overdue and then deftly sidetrack into other aspects of the reform that as a whole are, according to them, likely to decrease overall potential return beyond gains from load fee savings. Actually such stance has been quite common whenever topic of exorbitant fees was brought up – each time there came an ‘expert’ who would claim the government should focus on initiatives that could increase potential returns fetched by pension funds, rather than confining to taking the easiest way out, i.e. regulatory decreasing fees; thus denigrating the importance of low cost of the pension system for its participants.
On Friday I took a day off to make use of the great weather and catch up with some gardening. In the late afternoon I sat back in front of TV, turned over to TVP Info and watched a TV programme dedicated to the pension reform in which the audience were free to call and ask questions representatives of the ministry and pension fund managers, send text messages and write e-mails. The show contained also some footages recorded on the streets of Warsaw with people having their say on the reform and sharing the ideas on how to secure their pension. The picture that emerged from the programme was horrific. The economic ignorance in the Polish society is a crying shame. Most people do not understand how the pension system works and therefore can believe in every lie / misrepresentation / distortion they told about it. Given the level and bias of public discourse, an average Pole who lacks basic understanding of economics is meant to end up confused. Once they hear minister Rostowski saying the government is the best guarantor of pension payouts – this holds water, so why not trusting him? Then they see dr hab. Balcerowicz shouting the government is brazenly seizing citizens’ money to pay benefits to current pensioners at the expense of future pensioners whose savings are depleted – at first sight this also hangs together so they feel like a theft victim. Then they listed to prof. Oręziak who says due to existence of pension funds the public debt of Poland has risen by additional 300 billion zloty and pension funds are a huge burden for public finances that is a ball and chain – so again they think from the taxpayers’ perspective this must be a praiseworthy reform. Then comes up dr Petru who pronounces the government is taking the path of least resistance and instead of seeking savings somewhere else, destroys a good pension system and destabilises it.
Same issues, different opinions. If you are familiar with economics, you can critically assess utterance on the pension system. If you are not, clashing opponents make you even more lost and more indifferent about what is going to happen…
Meanwhile in the capital – soon comes the verdict…