For Poland’s early economic reformers, this year’s pension changes are a painful setback.by Martin Ehl 7 January 2014
The one-time reformers clustered around famed economist Leszek Balcerowicz have entered 2014 – the year of the 25th anniversary of the first free elections in post-communist Poland – in a foul mood. In a vote before Christmas, the government of the formerly liberal prime minister, Donald Tusk, dismantled one of their proudest accomplishments: the mandatory “second pillar” of the pension system, private investment funds.
The new law will take effect 1 February. President Bronislaw Komorowski hesitated but then signed the measure between Christmas and New Year's Day – and then sent it straight to the Constitutional Court. Other challenges may also soon arrive at the court from the opposition or from trade unions and employers' associations, which have jointly called for more changes.
So what actually happened in Poland?
The so-called open pension funds (OFEs), which last year got a rate of return of 11 percent, managed assets in December worth 299.3 billion zloty ($98 billion). All working Polish citizens born after 1968 have been required to send part of their income to these funds, which, according to the plans of the center-right governments of the late 1990s, should have played the role of stabilizer for payments to retirees and engine for the Warsaw Stock Exchange. Instead, the system has allowed the fund operators (mostly foreign financial institutions) to earn big money with just so-so performance while buying government bonds and helping to inflate public debt – far from the “pension under the palm trees” for ordinary citizens that advertisements of the era promised.
The key change, therefore, is that the OFEs now must transfer to the state pension administrator (ZUS) the money of those paying into the system when those future pensioners reach 10 years until their retirement, at which time the ZUS will pay them. The private funds must also transfer to ZUS their government bonds, which they will no longer be able to hold. The government will also require the funds to hold at least 75 percent of their assets as stocks, with the requirement dwindling to 15 percent by late 2017.
Pension funds will have to send ZUS more than 160 billion zloty in assets – beginning in February with all government bonds and in November with the personal savings of those approaching retirement age. The result will be that the funds will have to sell some of their shares. And if the number of Poles in the OFEs dramatically declines, they will have to sell more blocks of shares. At this point, it is estimated that the OFEs will sell shares worth a total of 10 billion zloty, half the monthly turnover on the Warsaw Stock Exchange. One of the side effects of the reform of the OFEs will thus be a reduction in share prices on the exchange because of these expected sales.
In essence, it will very much depend on how many Poles remain in the funds. Between 1 April and 31 July they must decide whether they want to stay in the OFEs, where since 2011 they have been able to send only 2.92 percent of their income (compared to the previous 7 percent), or whether they will send all their pension contributions to the ZUS. Those who don't notify the authorities within this time will have their contributions automatically placed in “subaccounts” in the state ZUS. Future pensioners can change their decision every four years during a four-month "transfer window" for those wanting to switch between the OFEs and ZUS, but the funds – under the threat a 3 million zloty fine – cannot advertise.
“The government project means the marginalization of the OFEs and their gradual liquidation,” the Polityka Insight think tank wrote in an analysis, summarizing the conclusion of those who have defended the OFEs, including most Polish economists.
It's unlikely that the constitutional challenges will succeed, especially concerning the transfer of assets from the OFEs to the state ZUS, as the Polish Supreme Court has previously ruled that money saved in the OFEs are public funds.
The transfer of assets will lower the public debt, according to the Polish methodology, by 8.5 percent, or by 9.2 percent, according to the EU's methodology. In addition, the government will save 4.8 billion zloty on debt payments on those canceled bonds.
Tusk has, however, not helped himself much before the beginning of this year's election season. Voter support for his Civic Platform party has long been slipping and the spring elections to the European Parliament will tell how steep the drop has been. The radical changes in the OFEs have also set EP member Jerzy Buzek against Tusk. Buzek, hugely popular in his Silesian region and leader of Civic Platform's candidate list for the EP, was the one who pushed through pension reform 15 years ago as prime minister. Then in the fall come important local elections.
The faint saving grace for future pensioners and old reformers Buzek and Balcerowicz are the improved conditions for the “third pillar,” or voluntary private savings. But so far a mere .3 percent of Polish workers have saved in the so-called IKZE funds. And it's unlikely now, after the latest raid on the pension system, that millions of Poles will jump into long-term savings funds when the state can so easily lay its hands on them.