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.
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