Wednesday, 9 February 2011
Planned change in Polish Pension system - personal comment
Investing in Poland - PwC on Polish pension system.
Not long ago Polish government announced it is going to change the way people's salary is being distributed between public and private part of pension system. Currently private Open Pension Funds (OFE in Polish) receive 7.3 per cent of worker's gross salary, whereas 12.22% of workers salary goes to public insurance institution (called ZUS). OFE's money is being invested, mostly in Polish bonds (about 70%), the rest in listed companies. Money which goes to ZUS is being redistributed to present pensioners.
Growing budget deficit forces government to look for money. They chose to redistribute money in the pension system differently. OFEs' are going to receive only 2.2 per cent, the rest is going to be stored in public part of the system, which pays pensions to current pensioners, therefore does not invest nor keep money. Even though government liabilities are not going to change (it will still owe the same amount of money to future pensioners), budget deficit is going to be lower (no money spent up front on private companies).
There is mixed opinion about those ideas among citizens and economists. They range from government's economic advisors ridiculous saying: "we do it, so pensions will be higher in the future', through "we have to save budget, even though pensions may suffer" to "keep your hands off people's money".
The truth probably lies somewhere in between. Despite its impact on pensions, economy and stock market in both short and long term, this decision has received negative publicity. Neither future pensioners nor private companies trust authorities. Even though OFEs charge fees, they buy stocks which represent real value. Even though they buy government bonds, country's officials will not be able to simply stop paying them back without reputation loss among international financial institutions. If the system becomes more dependent on its public part and if budget deficits go too high, ZUS will simply lower pension payments.
No one wants to starve when he reaches retirement, even though he will have paid huge amounts of money to finance the system (almost twenty per cent of money earned during lifetime).
Retirement system in Poland definitely needs to be reformed. E.g. official retirement age is 65 and 60 for men and women respectively. Average retiree quits job before his 60th birthday. The statistic is so low because there are many significantly privileged groups, e.g. railway workers. In my opinion - moving money from one account to another is not a reform and should not be done, because it does not solve any problems and citizens find themselves cheated by the government. They feel their money is about to be taken away and to some extent - they are right.
Picture comes from http://commons.wikimedia.org/wiki/File:La_Galera_3.JPG