Sixteen million Poles being contributors to the social security system have four working days left to choose, whether a fraction (roughly one-seventh) of their contribution will stay in the state-run pay-as-you-go (PAYG) social security fund (requires no action) or be diverted into private-run pension funds (requires submission of declaration), participation to which will be since now discretionary (couldn’t I have stretched the sentence out even more?). So far less than one million Poles declared the will to have 2.92% of their before-tax salaries to be transferred to private-run pension funds under the public social security system. The interest in the last days when the choice is possible has been growing exponentially and it is estimated the number of participants of the second pillar of the pension system will exceed one million, still far cry from government’s estimations from 2013 which assumed almost twenty percent (or three million people) would plump for pension funds.
I have already made a choice and anyone who has been carefully reading this blog would easily guess what my decision has been. In discussions with my friends and colleagues I have openly admitted which option I had chosen, elucidated reasons and have not encouraged anyone to change their mind. I actually favour the government’s idea to let people decide what the uses to their contributions to the system will be. To a few persons I mentioned the book I had recently read. Some of them, mindful of my general free-market and liberal orientation, were kind of perplexed to hear me speaking highly about the book written by a leftist economist, the most avid critic of pension reform in Poland, professor Leokadia Oręziak.
The situation with a man whose opinions are well-shaped is that in 99% of cases you cannot easily categorise them as 100% liberal or 100% socialist (simplifying the issue to distinction between two main undercurrents). I cannot claim to be a pure liberal, nor to be a pure socialist, I simply lean towards common sense and put faith in ideas that stand to reason. Sometimes ideas which might appear liberal in fact are not. The concept is brilliantly illustrated in the book by highlighting the paradox of neo-liberal doctrine backing the power of unregulated market and positing cutting back on inefficient and evil government. The same doctrine when it comes to private-run pension funds does not hold back from asking the evil government for ensuring participation in private-run pension funds would be mandatory, i.e. the bad state must coerce the citizens to pay financial institutions for managing their pension accounts. I learnt many times liberal doctrine assumes a man should be responsible for their deeds and should be given autonomy to decide about themselves, while the socialist doctrine assumes people not necessarily know what is best for them, therefore the government should take care of them and decide what is good for citizens and for this purpose seize more of their income in form of taxes. The outcome of the reasoning is that obligatory payments to private-run pension funds under the public pension system is a manifestation of socialism. This has been long ago said by independent liberals from Centrum im. Adama Smitha.
“Who benefits from this [existence of pension funds]?” (Komu to służy?) is a tad populist question frequently posed by the opponents of pension funds. The book casts a new light on that matter. It does not take a genius to discover none of the developed countries coerced their citizens to pay pension contributions to private-run pension funds being a part of public social security system. Of course saving for pension is wide-spread there, but is not compulsory. People look after their future pension on their own or via employer-run pension plans. Almost all countries which implemented obligatory pension funds have in common that they went through a debt crisis and were relieved of some of their sovereign debts. Such was also the case with Poland. One other common feature is that the debt relief was combined with assistance of the IMF and the World Bank and was subject to following requirements imposed by these institutions. For me, from the perspective of financial services sector, it is quite natural a creditor has a distressed creditor on a string. Now the last question to ask is whether the IMF and the World Bank are doing a huge bail-out job disinterestedly. If you believe when zillions are at stake any action can be disinterested, then the fact the list of developing economies which struggled debt crisis and were aided by the IMF and the World Bank and the list of countries which adopted the pension system in shape similar to that implemented in Poland in 1999 is just a coincidence!
Mrs Oręziak in the second part of her book cracks down on common myths on private-run pension funds advocates of pension funds spread to persuade people to superiority of capital pillar over state-run PAYG system. She debunks these myths (I also dissected most of them along the way) in a way intelligible for an ordinary reader. This part of the book is particularly worthwhile, albeit personally I would rearrange some passages from the argumentation and leave out others.
Although our views on the flop of the public pension system managed by private entities generally concur, I disagree with some of the notions Mrs Oręziak points out.
I personally doubt the government is a good guarantor of future retirement benefits. It only has different tools to dupe citizens, if in need, and by nature is less greedy and less costly. Besides, you cannot compare a pay-as-you-go system in which money collected in form of contributions from the employed flows to retirees as their benefits to a system in which payments are invested in financial assets, as returns on each of them depend on different factors.
I cannot agree if Poland had held on to defined benefit system, instead of shifting to defined contribution system, future pensions would have been higher. You cannot circumvent the proportion between the employed and retirees; you can only change the apportionment of income between the two groups. Poland needed the pension reform in 1990s, but it would have been sufficient to deeply reform state-run social security system to ensure it is balanced in the horizon of many decades but inclusion of private fund managers to the system was needed like a hole in the head.
It should not be taken for granted that the government will bring citizens a higher pension than risky financial market. The amount of pension in the perspective of decades will be the same from either source, because both financial markets and public finances are tightly tied to a country’s economy and pace of its growth. The only difference is that returns of pension funds are more volatile than increment of benefit from the social security – somebody who relies on pension funds is exposed to a timing risk (i.e. the risk that prices of assets in which a pension fund invested drop shortly before someone pensions off).
I also do not share the view the discretionary participation to pension funds, to which the government encourages, through system of tax deductions, is detrimental. The governments of almost all countries are not capable of providing their citizens with high pension benefits and it does not hurt to put in incentives for employees to save on their own. The different story is that the institutions which offer such financial services are usually far too costly and inefficient, so faced with a choice, I would never sign up for such plan. I am in the luck to have sufficient financial knowledge to look after my finances on my own.
To recap, the book, although I would not praise it without reservations, deserves two merits. Firstly, it is written in a simple, clear language, which is of paramount importance if laymen are to make up readership. It clearly presents causations in economic reasoning, therefore a reader finds it easy to follow and comprehend why something works or does not work. Secondly, the book is very factual. It contains more footnotes than pages so that reader can easily verify accuracy and integrity of the book’s content, which given the scale of controversies surrounding the topic, add a lot of value to the publication.