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Poles Dash to Stash Their Cash

Hundreds of thousands resist the government’s efforts to force them into the public pension system.

by Martin Ehl 5 August 2014

Long queues and the collapse of the government’s online services heralded the last day of July – when Poles had their last chance to register to remain in the second, private pillar of the pension system. The government of Prime Minister Donald Tusk decided last year to overhaul the system to lower the public budget deficit and thereby fulfill the criteria allowing Poland eventually to adopt the euro. The result has been the vaccuming up of billions of zlotys‘ worth of private pension savings by the state pension administrator, ZUS.

 

Before the changes, all working Polish citizens born after 1968 had been required to send, for the past 12 years or so, part of their income to so-called open pension funds (OFEs) – private funds managed mainly by foreign financial institutions. Now OFEs must transfer to ZUS the money of those paying into the system when those future pensioners reach 10 years until their retirement, at which time 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.

 

Poles will still have their personal pension account at ZUS but can no longer send part of their pension savings (2.92 percent of their income) into an OFE – unless they declared their intentions to ZUS offices by the end of July. And because many people tend to do such things at the last moment, we still do not know exactly how many Poles have remained in the second pillar. But almost 1.6 million Poles did manage to make the deadline, with another 100,00 to 150,000 estimated to have filed by mail.

 

That number is considered a success for the private funds, given the strong government push to change the system, along with a ban on advertisements for private pension companies.

 

It is, however, just a fraction of the original 16 million people who had been required to save in the OFEs, which were a main vehicle of privatization and a useful instrument for raising capital for new companies. To write that Tusk’s pension reform could end up being a huge, long-term blow to the entire Polish economy would thus not be out of order.

 

Initial estimates also suggest that the state pension system will run into trouble in any case because of emigration, a low mortality rate, and the increased pensionable years of members of the post-1945 generations (who were numerous and live longer). “Without help from the state, there could be a lack of money for pensions,” said Krzysztof Kwiatkowski, head of the Supreme Audit Office, quoted in the daily Gazeta Wyborcza.

 

OFEs also now have stricter rules and, with the changes, hold a mere 17 to 20 percent of their original capital income. And since the OFEs must continually send billions to ZUS – the savings of those approaching retirement – they are forced to favor short-term investments or keep cash on hand. That means selling off their assets, usually in the form of stocks of Polish companies.

 

“The Warsaw Stock Exchange will be a different market than it was for the last 12 years. It will lose about 4 to 5 billion zloty annually,” said Rafal Antczak, vice president of Deloitte consulting in Poland. But he said potential in the energy exchange market could help make up for the loss as the OFEs phase out some of their investments.

 

Antczak said those who have chosen to stay in the OFEs are likely making a political statement: Some free market reforms are still needed even though Tusk is not doing them. And we who remained in the OFEs do not believe the state can provide us with a decent pension income.

 

The change in the pension system has broken a 12-year agreement in society about the lesser role of the state and a more important role for individual responsibility when looking toward the future. This seems to confirm the usual post-communist feeling that a political decision can summarily end any deal hatched in society. Pension reforms were destroyed or fundamentally changed by politicians not only in Poland, but also in Hungary and Slovakia. While in the Czech Republic, the private pillar was created only recently, it is much weaker and the new government immediately began discussing its dissolution.

 

In the year of the 25th anniversary of the first semi-free elections, Poland has been presenting itself as a prime example of success. That might be true when it comes to the macro numbers or the use of EU funds. But the fate of its reformed pension system, underlined by the last-minute decisions of hundreds of thousands to stay in the private system, shows that long-term vision and a commitment to further development are not the strongest suits of Polish society these days. And it is not only the case of the Poles, unfortunately.

Martin Ehl
 
is the foreign editor of the Czech daily 
Hospodarske noviny. He tweets at @MartinCZV4EU.
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