The quest for a better tomorrow

The day when the new police law comes into force coincides with the monthly overview of Poland’s new rulers’ attainments. As a relatively unpopular foreign-language blogger, I consider my place at the list of enemies of the good change is near the bottom, so I feel free to share my thoughts.

On 19 January the Polish prime minister participated in a debate on threats for democracy in Poland. The course of the debate and its repercussions were a debacle of liberals and a huge victory for Mrs Szydło (whose hollow words and declarations made much better impression than worthless utterances of leftist and liberal deputies) and for all EU-sceptical politicians who put in superb stunt as allies of PiS. The timing of the debate coincided with the news of several refugee rapes in Germany being concealed from the public, a water to the mill of those claiming Germany has no right to interfere into functioning of democracy in Poland if in the name of political correctness they covered up crimes committed by jobless rabble…

On Monday the banking tax came into effect. The draft of the retail trade tax is now in the phase of public consultation and nearly everyone involved tears a strip off it. In the shape it is put forward the biggest retailers who were supposed to bear the burden of the tax are likely to be beneficiaries of it. The most dreadful part of the tax which might be a nail to the coffin of small retailers and which might send several people unemployed is the highertax rate for turnover generated on Saturdays, Sundays and on bank holidays. This will also mean end of cheaper petrol over weekends (it is less costly because many company cars can be fuelled up only during the working week), bigger discrepancies between prices working-week and weekend prices (typical practice for repricing food produces in Auchan) and generally lower competition, since some retailers will drop off. Customer beware, you will pay the bill anyway!

By the way, formally each draft law undergoes public consultation under the lawmaking process. Sound commendably, but I wonder when any amendment proposed by the opposition or any other entity participating in the consultation is included into any final legal act.

The PLN 500 child allowance draft law is also being consulted. There was a short discord between the ministry of finance and the government, but Mr Szałamacha was swiftly taken to the task. Funding for the generous giving away is secured for 2016, when the programme will be serviced only over nine months and when one-off proceeds of PLN 9 billion from LTE frequency auction are to flow in, but streams of revenues which will finance the allowance from 2017 onwards have not been defined. Besides, politicians of PiS keep on appealing to the wealthiest Poles not to apply for the allowance, instead of setting an income cap above which parents would not be entitled to the benefit.

Besides, worth mentioning pace of works on the draft bears testimony to the greatest lie of the pre-election campaign. On 20 October 2015, as the TV debate between Mrs Kopacz and Mrs Szydło was drawing to a close, Mrs Szydło showed a blue file with ready drafts of new laws. She also told she would show the documents during a conference right after the debate. Needless to say subsequently Mrs Szydło only waved the file and has never showed any draft law. An excellent PR stunt, I wonder only why everyone, including journalists and politicians from today’s opposition, has fallen for it no one has taken the trouble to check out what the content of the file was?

And just recently PO came up with a counter-proposal of an even more generous pro-family agenda of giving out PLN 500 for every child, regardless of income per person in a household. Jaw drops open. If the biggest, in terms of number of deputies, party in the opposition, keeps on fooling about like this, in a year they will enjoy support below 10% in the polls. In the meantime Nowoczesna.pl is losing its vigour. In the long run Mr Petru and his partisans are unlikely to retain support above 20% and if they miraculously manage to win the election, they will lose power quickly. Affluent and resourceful people who want lean and efficient state, in other words liberal electorate, make up a tiny, though growing, percentage of voters.

After Standard and Poor's downgraded Poland’s rating, Fitch and Moody’s have announced reviews of Poland’s rating within 12 months and warned of possible downgrades for reasons far more substantive than those behind S&P’s move. As two other rating agencies point out, generous government spending calls into question fiscal balance and in the long-run is likely to decrease creditworthiness of Poland.

The government is getting to grips with the ailments of state-owned coal mines. During the campaign PiS promised not to close any mine and not to make redundant any miner. After the reality check strongly unionised miners, in order to help the government meet its promises, will have to accept salary cuts. Good luck!

Finally the Smolensk crash stands a chance to be scrutinised properly! The new team of experts, some of which even have notion about intricacies of aviation, but none of them has experience in investigating civil nor military passenger airplane crashes, is to carry out an unbiased investigation and definitely will not set any hypothesis in advance; exactly like Mr Macierewicz who signed a decree setting up the team and subsequently during the conference on which establishing the team was announced, adjudicated there had been an explosion which blew up the Tu-154 plane some fifteen or eighteen metres above ground level.

Three weeks into public media takeover, apart from a few spectacular lay-offs, the change I witness is less spectacular than many expected. The extent to which TVP is PiS biased is similar to how TVN is anti-PiS biased. Different views are presented and guests with different views are invited, but the bottom line message delicately instructs audience how to shape their opinion. Nevertheless, fortunately TVP has not stooped to the level of TV Republika, lousy propaganda which would drastically decrease popularity of TVP.

It’s the economy, stupid

Thorough economic debate is a phenomenon so seldom witnessed in the public discourse in Poland that any reason seems justified to spark it off. Recently the widespread discussion has been triggered by Mrs Beata Szydło, candidate for the prime minister if PiS wins the autumn parliamentary election, who unfolded key points of her party’s economic agenda. As it often happens ahead of the election, politicians tend to be open-handed in their promises, but this time the generosity might have gone too far, since both politicians and economic pundits have taken the trouble to quantify the promises and check whether the figures hold water…

Politicians of PiS claim their ideas are absolutely feasible and the spending spree they propose will be matched by new sources of budget revenues. Their opponents from the Civic Platform and most experts point out the calculations of PiS are flawed and reckless inclination to throw about money would head Poland towards where Greece is now. Let’s have a look then on how much happiness the Lawful and the Just wish to give Poles if they get hold of power.

1)      Raising tax allowance to PLN 8,000 from current PLN 3,091.

- Truth be told, tax allowance in Poland is one of the lowest in Europe and well below the poverty line, plus it has not been increased along with inflation since 2009. But if are to compare ourselves against other European countries, we also need to take notice of the fact tax rates are higher there than in Poland.

- My proposal is then to simplify the tax system and bring in more effective progression by introducing an even higher tax allowance, let’s say PLN 16,000 and introduce a flat personal income tax rate of 32% (the current highest rate). Thus we would achieve effective tax progression, since the tax rate for an individual would be somewhere between 0% and 32% and increase linearly along with earnings.

- Cost of the proposal estimated by me: 24,400,000 * 18% * (PLN 8,000 – PLN 3,091) = PLN 21,560,328,000

- assumptions: 1) number of personal income tax payers: 24,400,000, 2) marginal tax rate: 18%,

- shortcomings of my assumptions: 1) multiplier effects from higher tax income and GDP growth on account of higher consumption are not taken into account, 2) other tax credits, e.g. child allowance also have been neglected.

2) Giving a child benefit for every second and next child of PLN 500 per month.

- My only question here is how to define the second and next children. Calculations are impeded by unclear definition of a child (until what age your offspring is a child and whether this depends on whether they learn or earn?, on the basis of what criteria the children would be counted – what if a woman has three children with three different men, or the other way round, i.e. a man has children with three different women?)

- I find the very concept ludicrous and see nothing else in it but pure giving away money from the public purse rather than encouraging people to have children.

- Cost of the proposal estimated by me: 10,879,729 * 40% * PLN 500 * 12 months = PLN 26,111,349,600

- assumptions: 1) a child is person aged less than 18 (if students are taken into account the cost would shoot up well above 30 billion PLN), 2) population of Poland is 38,580,600, 28.2% of which are not adults, 3) 40% of children would be eligible for the benefit – this is only an educated guess,

- shortcomings of my assumptions: 1) it is not clear, whether parents of students would also be entitled to benefits, 2) it is not clear when a child is “second and next”, 3) it is very hard to determine how many children would be “co-financed” with this benefit, 4) potential taxation of the benefit (or lack of it, of effects of tax deductions associated with it) is unknown, 5) multiplier effects have been neglected as well.

According to my estimations, only the two proposals would cost the budget around 48 billion  PLN yearly (vs. 29 billion PLN yearly according to calculations by PiS). If you look at the number of assumptions I have made and number of shortcomings I have listed, no wonder figures given by experts vary so much. To be fair, unless you reveal your (simplifying) assumptions and maths behind your calculations, you cannot hope to sound credible to me in the public discourse.

I do not dare to come up with a ballpark figure for the shortfall caused by reversing the pension age increase. The deficit in the government budget (which subsidises the social security system) by 2020 would probably not be substantial, yet thereafter (bear in mind in 2019 Poles either kick PiS out of the politics or it will be as entrenched as Mr Orban’s party in Hungary) outcomes of tampering with the pension age would be disastrous (also because tap with EU money will run dry in 2020).

On the other side of the budget, authors of PiS’ economic agenda point at three core funding sources for the merry expenditure programme.

1) The bank tax, to be levied on banks’ assets.

- My comment (disclaimer: I am a banking sector employee and my financial well-being might be jeopardised by the bank tax): such tax should penalise banks and other financial institutions for being involved in operations that do not contribute to well-being of a society, predominantly those which stray from the concept of traditional commercial banking (taking deposits and granting loans). I also wonder what the tax base would be: would those be total assets (including cash, treasury bonds, PPE, etc.), only financial assets, or maybe the tax base would be limited to the loan portfolio and whether there would be any risk weights on assets. Since the banking sector does not enjoy good publicity in Poland (banks have given ample reasons for being held in disregard), the idea of cutting back their mammoth profits with yet another tax should take fancy of many voters. On the other hands, most banks in Poland are controlled by foreign financial groups which have come to terms with the fact banking in Poland is no longer such great gold mine as it used to be. They will pass on the tax onto customers and since they will in unison have to bear the new burden, in unison they will raise fees and commissions for their customers, so in this very particular situation the arguments of PiS that free market and forces of competition will not let banks’ clients feel the impact of the new tax, are a daydream.

- Revenues from the proposal estimated by me: 1,500,000,000,000 * 0.39% = 5,850,000,000 PLN

- Assumptions: 1) total assets of the Polish banking sector: 1.5 trillion PLN (total financial sector’s assets in 2013 of PLN 2.1 trillion * 68% share of banks * 1.05 growth dynamics), 2) tax rate of 0.39% yearly, most often mentioned.

- shortcomings of my assumptions: 1) tax base and scope of entities subject to taxation have not been defined, 2) lower tax rates have been already mentioned by politicians of PiS since they slowly being to realise the bank tax proposal, compounded with relief for CHF-mortgage borrowers, could knock down some of the banks and necessitate a state-funded bail-out for depositors if their foreign owners decide to wash their hands clean of the Polish businesses.

2) Supermarket tax, being a turnover tax levied on retail chains with yearly sales above PLN 1 billion.

- My comments: the big chains of hyper-, supermarkets and discount shops, omnipresent in Poland and by dint of their economies of scale, offering less wealthy Poles an opportunity to buy stuff cheaply, also have become a scapegoat. A frequent argument in the debate on those shops is that taxes they pay are miniscule in relation to their revenues. Indeed, this is true, since most of those chains operate on very thin margins, yet their earnings are high due to scale of activity. For some of those chains, net margin is 1%, i.e. net profit of a company makes up 1% of total sales. Shareholders of such retail chains will have a choice either to increase prices of goods and pass on the tax to clients (more probable) or to wind down their businesses (impracticable). The former option is even more likely to materialise for the same reason as with banks – all big chains will be affected in the same way and therefore will react in the same way.

- Revenues from the proposal estimated by me: 150,000,000,000 * 1% = 1,500,000,000

- Assumptions: 1) total sales revenues of all big retail chains in Poland: 150 billion PLN, 2) tax rate of 1%

- Shortcomings of my assumptions: 1) publicly available data I cite are outdated (and thus biased downward) and may not cover all stores, since many companies decide not to disclose how much they earn (also resulting in downward bias), 2) the tax rate is unknown, but might vary from 0.5% to 2.0% according to some proposals.

3) The third and the broadest proposal is to increase the efficiency of tax collection system, curb tax evasion, crack down on illegitimate VAT reclaims. All the ideas are commendable and I wish well anyone who would take up doing so, yet I am sceptical about the effect and also would not dare to estimate the resultant additional budget revenues, nevertheless the figure of 50 billion PLN seems over-optimistic.

Interestingly, none of the critics of the PiS-designed giving-away scheme has noticed a crucial causation, namely the more money citizens have in their pockets, the higher the money supply. Growth in money supply, if not accompanied by proportionate growth in output, results in increased inflation. This in turn, assuming the central bank is independent, leads to higher interest rates with all consequences…

And interestingly, hypocrites from PiS, who allegedly care so much about the poorest, do little to redistribute wealth from those well-off. The proposal to reinstate the third tax bracket has been declined, probably to appease Mr Gowin (who has finally fallen into place and does not bring discredit on PO), yet this decision does not matter much, since those who potentially could be affected by signing the third tax bracket into law do not pay the personal income tax at all. 32% marginal tax rate affects in Poland the upper-middle class, around 2% of all personal income tax payers, those are usually senior managers at corporations, whose positions are too low to make them eligible for a managerial contract. Most of the people who really earn a lot (above 300,000 PLN before tax per year) are not employed under regular job contracts, but are sole proprietors who perform a contract for their employer. Outcomes for the state budget – marginal tax rate is 19% rather than 32%, social security contributions they pay are miniscule (in return they will receive a tiny pension benefit, but with such earnings would who cares?), same as health service system contributions. Taxes might be low for actual entrepreneurs, but the practice of paying corporate income taxes by corporate executives who are not entrepreneurs and do not risk their own money to develop their business ought to be finally put to an end!

My grandfather’s neighbour gives him outdated issues of Fakt, the leading Polish tabloid. Yesterday, while at my grandpa’s I grabbed one such paper and found this article… Maybe what Mr Sienkiewicz (cynically) says is the key to the door:

Przeciętny Kowalski patrzy na te autostrady, estakady, na ten dworzec, na cokolwiek innego… Jego podstawowe pytanie jest: a co ja z tego kurwa mam?! Gdzie jest ten pieniądz u mnie w portfelu? A nie że ma wypierdolonego orlika przed oknami, bo on ma w dupie tego orlika, podobnie ma tę autostradę w dupie! Bo dla niego jest pytanie o efekt rozbudzonych aspiracji, jak się rozbudziło aspiracje, to są pewne konsekwencje. Najpierw są takie aspiracje, aby państwo było bardziej umyte i bardziej przypominało to, co ma na Zachodzie albo co sobie wyobraża. A potem się aspiracje przesuwają do własnego portfela. I jest pytanie, co ja z tego mam.

Yes, Poland has remarkably moved ahead in terms of infrastructure. I travel a lot around the country these days and appreciate the possibility to get to Gdansk or Krakow by train within 3 hours, enjoy driving new motorways and expressways, but the progress has little impact on the standard of living of an average Pole. I follow the “Decrepit Poland” page on facebook. Authors of the page publish several photos a day to give lie to the propaganda story Poland has been ruined and needs to be rebuilt from scratch. Photos show progress, but are selective; round the corner beautiful market square gives way to dilapidated houses and inhabitants of provincial towns now care more how much they can buy in a shop for money they earn than whether the centre of the town has been refurbished.

Recent travels make me also wonder whether I also live in an ivory tower, how much I have in common with ordinary people living in Zgierz where I was on Friday. How much do I have in common with inhabitants of Wałbrzych where I’m heading tomorrow. Origins of PiS recent surge in support and PO’s waning popularity is the former’s ability to at least pretend they are close to ordinary people.

Another divide line in the Polish society

Poles excel at finding divisive issues to argue about. Was imposition of martial law legitimate? Was the Smolensk crash an assassination or a tragic accident? Was colonel Kuklinski a hero or a traitor? What does the rainbow on Plac Zbawiciela symbolise and should it stay there?

The most recent area of disputes among public figures and ordinary people is the controversial decision of head of one of Warsaw’s hospitals who declined to perform an abortion to a woman whose child was bound to be born grossly disfigured and die soon after birth from severe deformations (it happened last Wednesday) and who did not refer her to another doctor who would terminate the pregnancy (as set forth in the doctor profession law). The story has been succinctly recapped by BBC, yet the short write-up focuses only on facts and does not broach a wide spectrum of dilemmas involved.

Clearly, there is a conflict between Catholic Church teachings and official legislation. For Catholics, life is indefeasible since the moment of conception until natural death and this precept cannot be compromised in any situation. The Polish law, passed in 1990s and until recently serving as example of give-and-take in lawmaking, allows for abortion in clearly specified situations, when pregnancy is the aftermath or rape, incest, life of mother is at serious risk or when child’s defects are abject and incurable. Actually the short list of exceptions to general prohibition of pregnancy termination covers situations when lesser of two evils has to be chosen. The law also states a doctor whose beliefs do not permit them to get involved in some forms of treatment (e.g. performing an abortion), is allowed to refuse to grant a patient’s request, but is obliged to refer the patient to another doctor. This provision also clashes with the Church teachings, according to which a doctor who abides by the law becomes an accomplice. No wonder strong is the line of defence of the professor who draws a comparison to a pharmacy assistant who refuses to sell a poison to a would-be suicider, but refers him to another pharmacy round the corner. On the other hand, the pregnant woman was bestowed a free will and the doctor’s role could have been to persuade her not to have an abortion, but he should have been confined to a firm refusal.

The ever-lasting problem with assessment of abortion, in-vitro and other similar issues is whether an embryo is a child or not. Once you take a stand on this issue, your perception of the problem is easily (not an apposite word) tackled. If you think an embryo is already a human being, an abortion will be a murder. If you see an embryo as a bunch of cells unable to function on its own that can develop into a human being inside a woman’s body, your approach will be more liberal…

The provision under which doctors can decline to engage in some forms of treatment is called ‘the conscience clause’. Oddly enough, professor Chazan is most often accused of lack of conscience in his demeanour. He does not deny his aspiration was not to commit a sin and to prevent a woman (whose beliefs could have been different from his and who was legitimate to have an abortion under the statutory law) from committing the same sin. He also owns up to being in violation of law. His rules do matter, but in his pursuit of moral superiority he failed to fulfil each doctor’s obligation of care to the patient’s welfare. Each situation when pregnancy is the effect or rape or incest, or as in that case, the child would be born dead or with deformations or other afflictions resulting in immediate death is difficult. To reiterate, the choice is between the lesser of two evils. Some women would definitely prefer to give birth to a child with mangled skull, undeveloped brain, lacking nose and with dangling eye (press articles describe such obnoxiously the child) and keep it company in its suffering until natural death. Some women would prefer not to go through the trauma of prolonged watching their child’s anguish or spare it the suffering. Technically, the delivery was to be accelerated and the child would die naturally during it, or shortly thereafter…

The interesting paradox is that a fundamentalist Catholic’s conscience reaches as far as refusal to carry out an abortion, is some cases comes up a referral to a hospice or psychological care centre. There is much bitter truth in accusation that life-defenders are interested in defending the life between conception and birth. What happens later or what happens to a matter, not to mention the intercourse by which a woman got pregnant is beyond the scope of their interest. The child is to come to this world and who is going to bring it up, whether it will have proper care, a normal family whether it will have guaranteed means for subsistence, who it will grow into, etc. The Catholic doctrine thus fosters values and ideas and gives little care about humans, their feelings, suffering.

There are several other, more down-to-earth questions that deserve to be asked when looking into the scandal…

Why did the woman who wanted to have an abortion, turn to the hospital in charge of which professor Chazan was and why, after being turned away, did not she seek help with any other hospital? This question, though asked frequently, is a kind of pointless, as each and every public hospital should provide the woman with medical service she is legally entitled to have and the ‘conscience clause’ can be invoked by specific doctors, not institutions.

Is the timing of the breakout of the scandal accidental? Is it a coincidence it was publicised shortly after several doctors and students of medicine signed so-called declaration of faith, surrounded by controversies?

Is it the coincidence the lawyer who represents the woman is Mr Dubieniecki, the ex-son-in-law of the late president Kaczyński? Is he just grabbing the opportunity to put in an appearance in the media, to boot in complete opposition to his ex-wife’s uncle?

Mr Chazan’s decision to break the law conflicting with his beliefs was an example of civil disobedience. A big pity he is inconsistent in his deeds to refuses be disobedient all the way to reckon with a punishment. As a man of honour he would submit his resignation and suffer consequences, including paying a penalty imposed on the hospital he ran from his own pocket.

Reaction of the church and Catholic journalists speaks volumes about their attitude towards humankind. Professor Chazan has been made a martyr, is depicted as a victim, while suffering and feelings of the mother of the defected child are far in the background. The doctor who has saved the life is a persecuted while the moralists do not give a damn about the prolonged ordeal of the woman and her unborn child. While reading internet forums, one can see commentators almost unanimously take side of the woman. Again we see a growing dissonance between official statistics saying 90% of population of Poland are Roman Catholics and beliefs of majority of commentators (not necessarily on leftist / liberal forums) who think Mr Chazan is a cruel, unsympathetic bastard.

The disparity between Church’s official teachings and folks’ personal beliefs is unsurprising. The Church has not moved with the times and some points in its doctrine are inhuman. I doubt the Church will ever change its stance on abortion, but I believe in 100 years in-vitro will be accepted by the Church, just in the same way as other medical discoveries have been embraced by the Church, with considerable delay. Cross my heart, I recognise the problem the Church has with in-vitro insemination, but do not understand the evil of in-vitro. If people want to give their love to children, but for some medical reasons cannot have them, why should the medicine be prohibited from helping them?

Formally, Poland is a secular country. In practice, fundamentalist Catholics are growing in power. There is nothing wrong about high percentage of deeply religious people. The reason for concern is that they attempt to impose their beliefs on other people, with little respect to their autonomy. Unjustified withdrawal from the performance of ‘Golgota Picnic’ in Poznań in the wake of protests is one of the examples. The play was staged in theatres or other closed buildings and no one was compelled to buy tickets and see the performance, but defenders of morality wanted to prevent visitors from entering theatres… Another illustration is a ludicrous objection of a priest from Warsaw against putting up figurines of bull and bear (associated with symbols of demand and supply on stock market) outside the edifice of the Warsaw Stock Exchange who interprets bull and bear as pagan symbols. The more hilarious, although absolutely serious, hence absurdly scary, instance is a protest against Sunday yoga classes in Poznań…

The constitution of Poland guarantees its citizens freedom of religion, beliefs and autonomy of individuals. I hold those values dear and I do respect views of dissenters. I do understand someone might think yoga is a demonic set of exercises enslaving people and pushing them straight on the road into Satan’s arms. But they should understand other individuals might have a different opinion and the constitution guarantees them the right to attend the classes they want… And oddly enough, the louder the lunatics bleat they are persecuted, the more they meddle into not their businesses… How come?

Pension law - draft released

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…

Pension funds – awaiting the resolution

Low season is reaching its nadir. Summer, that according to long-term forecasts issued in May was supposed to end in June, brings weather ideal for those holidaying and not enviable for those having to work. In the meantime, far in the background, the government runs consultancies on the future of pension system in Poland. The temperature of public discourse is not as hot as in the last days of June, when variants of pension system turnaround were unveiled, yet at some moments emotions are running high.

Last Tuesday Jacek Żakowski invited for his radio interview in TOK FM prof. Leokadia Oręziak – probably the most avid academic critic of private-run pension funds. Her view of the issue is more or less the total contradiction of what Mr Balcerowicz advocates. Whoever wants to acquaint with the problem, can read the transcript, I will only take the liberty of pointing your attention to comment thread. In the last weeks I began to observe a shift in Poles’ view of pension system reform. In brief – Poles badly assess performance of private-run pension funds and costs (including charged fees) they generate, but discern superiority of pension funds over state-run social security fund (the lesser of two evils). The superiority consist in the fact pension funds are a pool of real assets, while the social security fund has no money, just a book record. Commentators frequently argue whether the assets in pension funds belong to them or not, quoting manifold arguments to underpin their assertions, some resort to insults to prove their supremacy :)

I particularly liked one comment (not remember where I read it) in which someone aptly noticed those who now are trying to capitalise on demonising pension funds and urge on scrapping them might in a few months end up is management or supervisory boards of newly created state-run institutions managing assets taken over from pension funds…

Some time ago I mentioned my futile attempt to check correctness of calculation of returns fetched by two pillars of the pension system. Last week the ministry of finance responded to accusations of Komitet Obywatelski Bezpieczeństwa Emerytalnego (literally: Civic Committee of Pension Security, abbr. KOBE) regarding wrong methodology in government’s calculations. The whole, 35-page-long response is available here. Whoever wishes to drill down into its, good luck, I see some more productive activities for Sunday summer afternoon, but one day I will probably revert to that document. So far the Civic Committee has not issued any announcement after the government’s counter-report. I leave the assessment up to you and can only bring two statements to your attention:

1) “prof. Marek Góra (...) Pytany, czy weryfikował obliczenia rządu i obrońców OFE, odpowiada, że nie. - Wyliczenia przygotowali znakomici ekonomiści, którzy nie mogą się mylić. Ministerstwo Finansów nie ma takich ekspertów” – these words have wound me up. There are no infallible people, even the most outstanding economists can be wrong and blindly trusting somebody on account of their impeccable academic credentials is appalling!

2) “Wyniki przedstawione w opracowaniu pokazują jak wrażliwe są one na przyjęty zestaw założeń „upraszczających"; w szczególności dowodzą, że w zależności od formułowanej hipotezy możliwy jest taki dobór mierników efektywności, aby wnioski z ich zastosowania przemawiały na korzyść OFE lub I filaru w ZUS” – this is what the whole dispute is all about and why it might never cease. Given multitude of variables and simplifying assumptions one has to make, there is plenty of room for manipulation. Tack on the pressure for reaching a specific outcome (the government wants to prove superiority of ZUS, while pension fund defenders will seek to prove superiority of OFE – look at KOBE’s webpage – am I only one who has impression their goal is to save pension funds, not the benefit of future pensioners?) and you will realise dashed are the hopes for finding impartial calculations…

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.

Nie będę płakać po OFE - pension system overhaul

With some considerable delay, the Polish government unveiled this week the long-awaited report containing a comprehensive analysis of the Polish pension system and recommendations for coming changes into its workings. Regular readers of this blog probably know the topic and my opinion on it inside out, yet if somebody has to catch up, follow these posts. The report, in Polish, can be found here. I have not found any English-language summary of it, yet for the sake of brevity, I will not summarise it, nor repeat anything I have written before as there have been no fundamental changes that need to be underlined.

Defenders of private-run pension funds being a part of public social security system have, predictably, torn a strip off its authors, accusing government-linked experts of manipulations, lies and use of propaganda, funnily enough without pointing at any specific example. The critics also say calculations presented in the report are distorted. Due to shortage of time and data, I cannot check accuracy of calculations presented in the report, yet if the only accusation is that the government presented investment results of pension funds net-of-fees, rather than gross-of-fees, then jaw drops open helplessly. For my part, I have found the report surprisingly substantive and unbiased and see in it one of few commendable recent attainments of PO-led government.

Albeit, let’s face the truth, this overhaul is carried out not because minister Rostowski cares so much about future benefits of the Polish pensioners, but the key incentive for pursuing it is the tightness of public finances.

The report analyses inter alia the impact of private-run pension funds on capital markets. As an analyst I have seen a few examples of stock-listed companies in which pension funds were major investors and those companies, actively managed by key shareholders, have been well-run. For many companies capital provided by pension funds was indispensable for development and proved a successful investment. Pension funds also contributed to development of Warsaw Stock Exchange and helped it grow to be the biggest such institution in CEE. But there is also the other side of the coin. The processes which have had favourable impact on Polish capital market will one day, due to changes in demographic trends, reverse. Today pension funds are net buyer of securities, but in a few decades outflows from pension funds will surpass inflows, as fewer people will work and pay contributions and more will be paid benefits. Then pension funds will be putting a downward pressure on stock prices and will have to dispose of some of its assets… Due to active ownership of shares in stock-listed companies, the recklessly made decision to nationalise the pool of assets in pension funds invested in stocks as it would have detrimental impact on Polish stock market and economy.

Pension fund defenders convince pension funds have contributed to higher GDP growth rate, while the government claims the effect on economic growth has been negative. The former back their assertion by arguments I mentioned in the paragraph above, the latter point out transfers of part of pension contributions transferred to private-run pension funds, which had to be replenished by subsidies from state budget, increased government’s borrowing needs, debt-to-GDP ratio and thus debt service costs. However, the same debt was later purchased by pension funds, hence increased demand for borrowing from the government was balanced by increased demand from pension funds – those two have cancelled each other out, leaving yields on government bonds roughly unchanged, with some intermediaries (private companies managing pension funds) charging a considerable percentage of that “hollow circulation of funds” as fee for facilitating the process. Their revenues, from standpoint of future pensioners generated a loss.

The report highlights the problem of “double-tax generation”. One of the goals of the pension reform in Poland was a shift from pay-as-you-go to capital system. Under such move, one working generation had to pay contributions for benefits of current retirees and, at the same time, “save” for their own pensions. Is such burden not to heavy to carry? Authors of the reformed wanted to fill the gap by proceeds from privatisation, as the generation of current retirees, working in socialist Poland, had built many of the big state-controlled companies. Privatisation itself should be a goal, but not at any price and not to, let’s face it, meet current government expenses. The whole concept of privatisation as source of funding for the reform, resembles me a granny who sells her unnecessary jewellery to make ends meet. Whether it is wise – I am not the one to judge it…

The issue hardly anyone broaches is conditionality of state’s liabilities towards pensioners. In the Social Security Fund you have book records, while in pension funds you have government securities. Both are the government’s promise to pay, either directly a pension, either to repay bondholders. However, due to form of insurance, book records in Social Security Fund are conditional – these liabilities turn partly unconditional, when a Fund member retires; in pension funds, where assets can be inherited, the liability is conditional as long as a member does not retire. Minister Rostowski declared the part of assets transferred from pension funds to Social Security Fund will also be inheritable, hence in such way state budget would not be better off.

And the last problem, with which I have not come up – frankly speaking I hatched the idea on one of Internet forums – is the functioning of pension funds in the light of MIFID. Under investor protection regulations, if I was to pay my money into investment fund with exactly the same investment policy as a strictly regulated pension fund, I would be obliged to fill in a survey to check suitability of such investment for me, and in case of unsuitability, I would be warned against it and would have to sign a statement despite the warning I want to invest in a risky product. In the case of pension funds, nobody bothers to follow such procedure, which disproves the untrue claim that “in pension funds there are people’s money”.

The government presented for further discussion 3 variants:

1. The pool of assets in pension funds comprising of government securities is transferred to Social Security Fund and booked on accounts allocated to future pensioners. Other assets in pension funds remain intact, 2.92% out of 19.52% pension contribution goes to private-run pension funds which are not allowed to invest in government-issued securities, the rest goes to Social Security Fund. Furthermore, internal benchmark mechanism (pathological) is scrapped, but indebtedness ceiling level (currently 50%, 55%, 60% of debt-to-GDP) are accordingly decreased to prevent rise in public debt.

2. Citizens are free to choose, whether to participate in private-run pension funds, or to rely only on state-run Social Security System. The proposal, as I far as I could notice, does not pin down the split of contribution between state- and private-run parts of the system. This option is more controversial, as system participants would have to submit declarations they want to stay in a specific pension fund; not submitting a declaration would mean silent assent for transfer of assets to Social Security Fund, plus such decision would be irrevocable, while the decision to stay in a pension fund could be revoked any time in the future). Moreover, there is a problem what to do with shares of companies transferred to Social Security – this would be hard nut to crack, yet feasible, the report contains some recommendations with feasibility and drawback analyses. The idea to “write off” government bonds transferred to Social Security Fund would have to be thoroughly analysed by lawyers, as this smacks of sovereign default!

3. Extended freedom to choose – if someone chooses to stay with a pension funds, pension contribution to private-run funds would be 2 percentage points (in relation to pre-tax salary) higher. If you read between the lines, the message is “if you think private-run pension funds are so good, why not pay them more?)

The government also resolved that state-run Social Security System will be responsible for all benefit payments and assets from pension funds will be gradually transferred to Social Security Fund over last 10 years before retirement, to minimise risk of lower pension due to downturn on financial markets.

As commentators say, variant 3 is least likely to go through, while oppositional parties lean towards variant 2. I also hold the view that, despite some of its drawbacks, would be the lesser of all evils and, if amended properly (I put forward a citizen has to submit a declaration if they want to have assets allocated to them transferred to Social Security Fund and shifts between state-run and private-run funds could be done many times and in both way, of course in minimum intervals of let’s say 6 months), should be implemented.

What I did not like about the report is that private-run pension funds and their managers who have ripped over 17 billion PLN off future pensioners are presented as scapegoats. They are only a beneficiaries of legal framework created by politicians and if somebody is to blame, these are politicians, who passed such law, thanks to social support achieved thanks to several misrepresentations. Imagine you are a wife and your husband asks in his buddies to your house and lets them eat the whole content of your fridge, piss in your garden and demolish your furniture – your husband is to blame, not the buddies who were allowed to do damages.

One of my colleagues from work told me pension funds from the beginning were meant to be the scapegoat (not only the best, for reasons below, business on earth). In fact, to tackle demographic problems you only had to shift from benefit-defined to contribution-defined system, raise retirement age, scrap some privileges and create legal framework for voluntary private-run system of pension saving or insurance. At the end of the day, how high pension benefits will be depends only on standing of the economy, as investment results of pension fund in the long run depend on them. This means obligatory pension funds create little value added, and, provided calculations in the report are accurate, costs they generate are higher than value added they generate.

Now comes the time for consultancies. The debate will be fierce, as the prime minister said, big money is at stake – but for both sides of the argument. Minister Rostowski will play for more balanced budget, pension funds and its defenders will play for state-guaranteed source of profits on risk- and responsibility-free business. And I believe interests of the future pensioners are somewhere near the bottom of the list of priorities defenders are opponents of pension funds have.

I only fear the pension funds will draw another divide line in the Polish society. We have Poles who believe Martial Law in 1981 prevented a disaster and Poles who believes general Jaruzelski (turning 90 next Saturday) declared it despite there was no threat of Soviet intervention only to nip in the bud growing social movement. We have Poles who believe Smolensk crash was a tragic accident being aftermath of human errors and Poles who believe it was an assassination. From now we will have Poles praising government for dismantling the biggest scam in over 20 years of Third Republic of Poland and Poles believing the government wants to take over their money.

For the very end, I was deeply astonished by press conference on Friday by Mr. Balcerowicz, one of leading defenders of pension funds. When I looked at his wrathful face when he avidly spoke of “lies, misrepresentations and propaganda” I feared he would kick the bucket. He did not, but I am curious to find out why he failed to mention a single, specific lie and disprove it. Is it so difficult to say “the statement you can find on page X, paragraph X of the report, i.e. “quote” is untrue, because this and that”? Why has he not done it?

The release of the report coincides also with congress of the Civic Platform, held this weekend. It made me realise if I were to choose, I would opt for Donald Tusk’s platform, not Jarosław Gowin’s one. I opt for moderate economic and social liberalism, not conservatism. But above all, I opt for sound mind and common sense!

Pension system in Poland – pending overhaul…

The topic of private-run pension funds in Poland (the biggest scam in the history of Poland after 1989 IMHO) has been shelved on this blog over two years ago. Back then I outlined a relatively decent (how modest of me) summary of its workings and the government’s plans at that time. As I see no point in flogging the dead horse, if you need to catch up, please revert to ample previous posts where you can find both my private opinion on the workings (and pathologies) of second pillar of Polish social security system, as well as an unbiased description of it.

By the end of first half of 2013 the government plans to carry out a long-awaited comprehensive review of the whole pension system in Poland, the review is bound to cover not only the private-run pension funds, but also other contemptible features of it, such as privileges for many groups of professionals that need to be funded from taxpayers’ purse.

As the results of the review have not come to the light, there have been speculations regarding what the government might do to enhance workings of the private-run pension funds. As some of the government-liked economists claimed, any outcome was conceivable, including fully scrapping the pension funds and moving assets from there to state-run social security fund (running deficit for years), if their existence was deemed detrimental to future pensioners and public finances. This most abject plan has been given up, as one of three main rating agencies threatened to downgrade the rating of Poland if the government seized assets accumulated there. The Polish government is aware that you shouldn’t mess with ruthless financial markets and it quickly backed out of such option, declaring it had never come into play. I’m in two minds about such stance, but it’s hard to deny the government the foresight in this respect. Lucky streak of low debt service costs will not last forever…

Now to the point. Pension system is an element of public discourse; several economists, politicians and, let’s speak it out, lobbyists make several statements to shape Poles’ opinions on it. The problem is some of them are not home truths. I will confine to pointing at just three most blatant… Distortions? Misleading statements? Departures from truths? Misrepresentations?

Misrepresentation 1: Money amassed in pension funds are Poles’ private savings.

The sentence above could be a nice illustration of the English idiom “pack of lies” – let’s count how many lies can you pack into one sentence.

“Money” – what money? Pension funds are a pool of assets, including two key types: government bonds – ca. 55% and shares of publicly traded in Poland companies – ca. 40% (the rest are miscellaneous assets, also cash and bank deposits). These assets are hence securities which represent either a government obligation to redeem its bonds, or ownership stakes in companies.

“Private” – further on, pension funds keep records of their participants in relevant registries, thus each participant is allocated a share in the pool of assets (recorded as number of “settlement units” allocated to them), each share has the same composition of assets. Now how come it is “private”? How come many claim those “money” belong to future pensioners, or is even owned by them? Let’s look at some facts? On 4 June 2008 the Supreme Court of Poland handed down a ruling (quoted and linked in one of previous posts) which clearly stated assets in pension funds are a part of public social security system, hence contributions to pension funds are obligatory. This should dispel all doubts – whatever assets are allocated to the account assigned to you in a pension fund, they are owned by the state. If however, just like many other people, including dr hab. Leszek Balcerowicz (interesting why everyone titles him “professor”, if Mr. Balcerowicz does not hold this academic title, it is only his position at the university I graduated from), claim this is your money, ask yourself a few fundamental questions:

If it is your money – why can’t you withdraw it and spend it the way you want?

If it is your money – why can’t you have influence on how it is invested?

If it is your money – why can’t you use this assets as a collateral for a loan you wish to take out?

If it is your private money – why are you forced to pay huge load fees to private companies managing it?

The only advantage of it “savings” in pension funds is that they are inheritable. There are of course some restrictions aimed to keep “money” in the system, but indeed there are case when contributions, depleted by fees charged by management companies, can come out of system in real cash. Unfortunately the only such circumstance is death…

“Savings” – peculiar are savings funded by debts run up by the Polish state of the taxpayers… With some “little” help of 14 useless, yet expensive intermediaries. No comments…

Misrepresentation 2: Pension funds fetch high profits.

Remember the adage there are “lies, damned lies and statistics”? You could add financial reporting tricks to that list. Here the trick is simple and only recently somebody bothered to analyse its impact on returns brought by pension funds.

The mechanism is very simple – what in all statistics is presented as rate of return is a growth in value of “settlement unit” – a book record representing market value of some portion of assets in a fund. Example: let’s assume now your contribution to a pension fund is 100 PLN. The moment you make a payment one settlement unit is value at 10 PLN. 100 divided by 10 is 10, so you should have allocated 10 settlement units to your account. And here’s the catch! Because load fee for each contribution is 3.5%, only 96.50 PLN out of 100 PLN is invested in assets in the pension fund, the rest goes to oil the wheels of the pension system, majority of which to private management companies. Now let’s assume the value of funds’ assets rose by 4% over the reporting period, so the end-of-period value of one settlement unit is 10.40 PLN. Now recall you bought 9.65 settlement units. Value of assets allocated to you is 9.65 times 10.40 = 100.36 PLN. Your rate of return is 0.36%! Surprised? Now let’s face some other facts: I omit management fees, as they are included in valuation of settlement units, at the reform inception load fee was 10%, then 7% and some 3 years ago it went down to 3.5%. Imagine then break-even rates of return, i.e. by how much market value of funds’ assets had to increase to let their participants earn at least a nominal return (answer: they are respectively: 11.11% and 7.53%), let alone above-inflation one. To recap, given that yields on government bonds run near inflation rate and returns on stocks are very volatile, this system cannot (has a built-in inability to) generate profits to future pensioners. The only beneficiaries are private companies administering it.

Misrepresentation 3: Obligation of the state in form of issued bonds, purchased by pension funds, better secures future pensioners’ interests than promise in form of book record in state social security fund.

Giving lie to this statement takes very little. Let’s look at the example of Greece on the verge of bankruptcy. Bondholders had to accept 53.5% face value haircut, which means out of each single Euro they recover 46.5 Euro cents. Most pensioners have not seen their benefits declining by such percentage, usually in nominal terms their benefits fell by 30%. Media reported single cuts by 60% or 70%, however these hit most privileged Greek pensioners. Moreover in November 2012 Greek Supreme Court declared pension cuts unconstitutional. The same, under the current legal framework, would probably happen in Poland, if it, heaven forbid, was nearing default. Get real! Promise on form of bonds has no higher value than constitutionally protected right to participate in the social security system!

One more misrepresentation is in the calculation of state’s liabilities towards future pensioners. Pension funds advocates claim thanks to existence of pension funds, they become explicit, while in the state-run social security fund they are hidden. They also calculate book record of sum of liabilities on technical accounts with social security fund. They only forget about one detail – these are all contingent liabilities – the state does owe that much to people, as this worst-case scenario comes to a pass only if all people reach pension age. Once somebody dies before retirement, liability towards them is erased. There is no indecency in it, as social security system in Poland functions as insurance – if you pay contributions, you may, bit not have to get the benefit.

Hope it has given you some food for thought, and not for the last time.

The pension debate - part 2

A follow-up to the previous post.

Issue 3: the reform is to crack down on budget deficit and avoid reforms in the election year.

Me: sad, but true. The pension system is overhauled because public finances are in a pitiful state, if they had not been, status quo would have been maintained.

JR: state expenses on infrastructure, education and reduction of public debt contribute to development.

Me: When I look at how private universities and private-run motorways function in Poland I can go along with this.

JR: There is no difference between government bonds and accounts in ZUS.

LB: In ZUS there is nothing, but politicians’ promises. Real securities are kept in pension funds.

Me: A very important point in the discussion in which both LB and JR are partly right. Both government bonds and promises in ZUS are promises of money made by the government. If things go bad, pensioners will have their benefits cut before the government goes officially insolvent and bondholders will be paid off. If things go very bad, both pensioners and bondholders will lose. If things went really bad, the state would probably take over all assets from pension funds (they belong to the state!) to protect itself from bankruptcy! Changing promises in ZUS into government bonds is like buying insurance policy against political risk. The problem is, for me, that insurance premium (fees paid to pension funds and costs of higher interest paid by the state on government bonds) is much too high and hence the whole insurance is not cost-effective.

JR: After the new reform, state-run ZUS will be balanced in the long run, i.e. contributions will cover benefits and the government will not have to subsidy it.

Me: I cannot check, I have no data.

LB: Pension funds will offer higher pensions, because they contribute to economic growth.

JR: Reduction of payments to pension funds will contribute to economic growth, through lower public debts.

Me: At the end of the day both effects of both moves are more or less the same…

Summary:

LB: Pension funds will offer higher benefits because they propel economic growth. Scrapping pension funds undermines the trust citizens put into the state.

LB: Pension funds create huge public debt. Higher public debt means higher costs of servicing it and higher taxes (interests paid on government bonds are taxpayers’ expenses). Means in state-run ZUS are protected by the constitution, hence safe and can offer high pension.

Me: Both guys have annoyed me. Dear Mr Balcerowicz, I do not trust state that secures revenues of 14 private companies owned by multi-national corporations, when other companies struggle to compete on free market! Dear Mr Rostowski, you are promising the moon. The Polish state cannot afford to revalue balances of personal accounts in ZUS at rates you suggest and cannot afford to let part of the money paid into ZUS to be inherited!

The debate however, did not touch upon some other important issues.

A) Nobody called into question that investments on stock markets fetch higher returns than other investments. In the past it was true, but in the era of deregulation, speculative capitals flowing and ebbing, reckless monetary policy, cycles of boom and bust I would not be sure this old rule will be true. It might not be true for the same reasons for which the pension system would collapse – demography…

B) Nobody brought up the issue of real (issued securities) and hidden (obligations towards future pensioners) public debt. Mr Balcerowicz wants the to convert hidden public debt into real one, Mr Rostowski wants to increase hidden debt at the expense of real one. Both types of debts have to be settled, however hidden debt can be redeemed (for example if someone dies before pensioning off) and does not have to be refinanced on ‘ruthless’ financial markets and hence increases the state’s flexibility.

C) Both advocates and opponents of the current pension reforms cited their calculations to prove which variant offers higher benefits. Why has nobody mentioned on what assumptions were these calculations based?

D) “Last but not least” – costs of pension funds, not those borne by taxpayers as higher costs of servicing public debt, but fees paid to pension fund managers. PTEs charge a distribution fee of 3.5% deducted from each contribution and management fee of 0.6% per year. Round the total figure down, and you will get costs of a pension fund standing at around 4%. It means if you pay 100.00 PLN into a pension fund only 96.50 PLN is invested, from the rest management fee is charged over the year. Let’s calculate it. If we assume inflation is at Polish central bank’s target of 2.5%, the rate of return brought by a pension fund has to be 6.5% to break even in real terms! Can pension funds offer a rate of return averaging out 6.5% in the long term? Honestly speaking the rate until now averaged out 9%, so maybe they can. But despite this most people (me too) have less money in ‘their’ accounts in pension funds than they have paid in, because sky-high fees have eaten up the profits! Now the distribution fee stands at ‘only’ 3.5%, but in first five years (1999 – 2003) it was 10.0% and from 2004 to 2009 it was 7.0%. With such fees breaking even in nominal terms was barely feasible (interest of government bonds was high at that time). Returns of pension funds are shown in ‘accounting units’ which is another distortion, because ‘accounting units’ are not purchased by the whole sum paid into a pension fund, but by what remains after charging all fees. So all those arguments about high profits brought by pension funds to future pensioners are a spoofery. Profits are, but for companies that manage funds…

And the winner of the debate was:
- in my, my parents’ and colleagues’ opinion – Mr Rostowski,
- in fellow students’ opinion and according to polls – Mr Balcerowicz
- the ultimate winner was one of the moderator – Tadeusz Mosz, for saying a few times there is as shortage of money in Poland.

As you can see, both parties have their own “truths” (a propos truths – one of the best articles about pension reforms I have read), assumptions and calculations. But this is still a positive dimension of the dispute. Unfortunately, I want to share two unsettling observations:

Firstly, there is an old rule, dated to ancient times, saying no-one should be a judge in their own cause. In the case of pension funds this rule has been broken, as many times those who stand up for status quo draw measurable financial benefits from the reform, by having cushy jobs in supervisory boards of PTEs or being in charge of organisations funded by PTEs. It is quite clear that if the flow of money into pension funds is stemmed, their revenues (secured by the state, not earned on free market) will drop. I actually do not want to deny them the right to defend their own interests (lobbying can be civilised as well), but I would prefer if they did not hide their true intentions. PTEs do not give a damn about benefits of future pensioners, but care about their own profits. This absolutely normal and rational in business, if I were in their shoes, I would also try to preserve the current system, but I would not go overboard with resorting to feigned care about future retirees. This hypocrisy should be finally condemned.

If the punch line of the paragraph above is not clear yet, let’s illustrate it with another example. I work at a bank. The government is planning to introduce a bank tax. It is also quite obvious that if the bank tax is levied, my income can decline, as my bank will have less money for bonuses. Should I voice my disapproval and take part in the debate about the new tax? There is no clear answer to this question, but I would personally deny myself the right to do it. For sake of integrity and decency I would keep my mouth shut. And if, for any reason, I decided to raise an objection, I would stress my personal interest before stating any opinion.

Secondly, sides of the discussion have been beforehand categorised into better (for pension funds) and worse (against them). The consensus about pension funds can be compared to situation in Polish politics in 2007. Then it was ‘cool’ to vote for PO and ‘not cool’ to support PiS. The same trick has been done about pension funds. It is generally acceptable to be for them, and those who say something is amiss about the shape of pension reform are hailed as ‘cranks’ (oszołomy). Thus I have joined (long ago) the group of cranks, whose views are too controversial to be reckoned with. The most powerful detractor of the current pension system is the ultra-liberal think tank Centrum Adama Smitha, which has come up with a proposal to take a leaf out of Canadians’ book and reshape our pension system, so that the state would guarantee a low pension benefit (enough to scrape along by, funded from taxes) and for the rest taxpayers would have to take care on their own. This would mean scrapping both state-run ZUS (in fact only its part responsible for collecting pension contributions and paying out pension benefits) and obligatory contributions to pension funds.

The determination defenders of pension funds display is enviable. In the wake of the government’s decision Krzysztof Rybiński announced he would file a class action against the government. Alas, he did not read the new class action law carefully and did not notice the basis for filing a class action is a measurable loss incurred by each member of the class, not an estimation. The problem is that before someone retires, they cannot measure their loss. There is, nevertheless, somebody who can sue the government under that law. Those are companies that manage pension funds and charge sky-high fees. Their unearned revenues are measurable and are a solid basis for lawsuit against the Polish state…After all these companies and people affiliated with them (some of them are authors of the reform) are the key beneficiaries of the reformed pension system…

The saddest thing in the whole case is that many people believe (usually because they have been misled) assets (i.e. mainly government bonds and stocks) pooled in pension funds are their money, which is a big departure from the truth, for a single, yet meaningful reason – the ruling of supreme court, dated 4 June 2008, the money obligatorily paid into pension funds is not owned by the person who pays it

W 1998 r. ustawodawca wybrał określony model ubezpieczeń społecznych. Państwo ma zaś konstytucyjny obowiązek zapewnienia środków na zabezpieczenie społeczne każdego obywatela. Nie można się zatem powoływać na normy konstytucyjne o ochronie własności prywatnej, bo podlega ona ograniczeniom. Składka odprowadzana do OFE ma charakter publicznoprawny, zaś świadczenie z II filaru jest gwarantowane przez państwo. SN zwrócił uwagę, iż w praktyce będzie dochodzić do sytuacji, kiedy pewne osoby będą żyły dłużej niż środki zgromadzone na ich kontach, przewidywane na określoną długość życia; w takim przypadku oczywiście ich świadczenia będą musiały być finansowane ze składek innych osób. Z tego wynika, że ta składka nie jest prywatną własnością ubezpieczonego

In practice it means assets in pension funds are owned by the state and managed by private companies under public-private partnership. After all benefits from pension funds are guaranteed by the state (if the worst comes to the worst and the reform turns out to be a big flop). It also means citizens do not have any influence on investment portfolios of pension funds, nor can use the money at their discretion. Opponents of government say prime minister Tusk and finance minister Rostowski want to deprive us of our money and here is the catch. They indeed can do what has been done in Hungary or Argentina, where all assets kept in private-run pension funds under state-owned systems have been taken over. In Poland this or another government can do the same, because the law allows for it. Therefore I am against compulsory payments into pension funds. The contributions there are not safe, as my savings in stocks, bonds, bank deposits, investment funds are and assertion that transferring money into pension funds under state-owned system increases security of our pensions is a daydream…

While the government, deemed to be liberal, dismantles the reform which has been said to be pro-market one (I would call it into question), opposition parties, deemed to be rather statist, struggle to take a line on the reform. Both PiS and SLD spite the government, just for principle. PiS puts forward that each Pole should be given the freedom to decide whether to save in ZUS or in pension funds. This proposal does take my fancy, but I could not find any technical details of its implementation. Technically transferring huge amounts of money between ZUS and pension funds is barely feasible. Leftist SLD should, in principle opt for state-run social security rather than private funds, but this time their reasoning does the other way round. At the end of the day the left-wing party organised a public hearings and suggested that share of contribution paid into pension funds by citizens born after 1980 should be higher than paid by those born earlier. Those born from 1949 to 1968 should be able to return to state-run insurer. Both counter-proposals seem to make sense, but unfortunately we have too think pragmatically here and pragmatism has its painful limitations…

Is the whole current reform a good move? I have long been in two minds about it, but all things considered I am for the current reform. Given the choice, as put forward by PiS, between ZUS and pension funds, I would after all opt for the former, even if I had to put all my eggs into one basket, have a lower pension benefit and believe in promises rather than in real assets. The social security system in Poland is bound to collapse, so it the reform can postpone the moment it happens, may it be. May at least my parents get their pensions before they die, I do not expect much from the state. Obligatory payments into private companies in the way pension system in Poland is arranged are a typical example of privatising profits and socialising losses and it stands at odds with my values. Pension funds are too expensive (in terms of fees they charged) and hence cannot, as I pointed out earlier, in the long run, offer me a high rate of return. And after all I considered the failure of pension funds to be a government failure, not a market failure. Pension funds are so stringently regulated that the environment in which they operate is far cry from free market. Form of ownership is not the only determinant of a company’s efficiency.

The biggest pity about the whole issue is that most Poles do not understand what actually is going on and what is at stake…