Future at stake
Experts are convinced the system can work, if politicians refrain from dipping into the system to pay for state projects and early retirements.
Tomorrow's retirees are fretting over the future of their nest eggs after Labor Minister Anna Kalata announced a proposal to transfer assets from open pension funds (OFE) to the state-run Social Insurance Institution and the passage of a bill transferring supervision over the insurance system from the Labor Ministry to the Prime Minister. Experts say the system can work efficiently and fairly, if politicians avoid making shortsighted alterations.
The Social Insurance Institution (ZUS), Poland's social-security behemoth, reigns sovereign over a host of sensitive entitlement programs, including unemployment benefits, social assistance, pensions, sick or maternity leave and national health care. Due to its broad bailiwick, the actual administration of ZUS' various branches falls to several different agencies, including the Ministry of Labor and Social Policy, the Ministry of Agriculture and Rural Development and the Ministry of Health. Cooperation between these entities is often difficult to arrange and reform even harder won.
Thus, a recent decision by the Sejm granting the Prime Minister's office supervision over the social insurance system doesn't worry experts too much. "I interpret this decision as the Prime Minister guaranteeing the completion of the [1998] pension reform," says ZUS supervisory board member Jeremi Mordasewicz.
The Prime Minister's involvement is especially important, considering the fact that many vital issues of the reform haven't been agreed upon yet. Bills on the way the pensions should be paid, and regulations on bridging pensions and disability pensions all need parliamentary attention as soon as possible, since the first pensions under the system, which was planned in 1998, are to be paid out starting in 2009.
Funding concerns
More worrying for expert observers is Labor Minister Anna Kalata's proposal to transfer funds from OFEs to ZUS. "A state institution such as ZUS was not established to manage funds on the capital market and is not ready to," Mordasewicz says. The transfer of premiums collected by OFEs to ZUS could transform the institution into an overly powerful force on the capital market. "We are talking about zł.100-billion-plus funds … such a player could throw its weight around on the market," Mordasewicz adds.
Moreover, experts say that putting these enormous funds in the hands of a state-owned firm would be tantamount to putting them directly into the hands of politicians. "There is no guarantee that politicians won't exert pressure as to where to invest the funds - in infrastructure or construction for instance," Mordasewicz points out. "The funds could be used to buy unprofitable state bonds and thus finance public debt," explains Maciej Kossowski, an expert from investment advisory firm Expander.
That could hurt both the retirees' savings in ZUS' hands as well as the funds being saved up by future pensioners in OFEs. "We have to keep in mind that OFEs and ZUS would both compete on the capital market for the same securities," says the president of PPE Konsultanci, Maciej Rogala. "If the value of the bonds falls, it could affect both those saving and those already retired," he concludes.
Despite the worries stirred up by the proposal, Mordasewicz urges calm. "From what I've heard, the Prime Minister is leaning towards OFEs controlling the funds," he says.
You get what you pay for
The recent ideas result from the fact that pension reform, which began in 1998, has never been completed. The structure and rules for saving from the 1998 reform were implemented, but a decision concerning payment of the pensions was put off. The reform turned the pension system in Poland upside-down.
"In the previous system, there was no relation between premium input and the level of the pension," Rogala explains. One's pension didn't depend on salary and premiums paid, but rather on membership in privileged social groups. In addition, the system was based on a so-called 'inter-generational agreement,' where pensions are financed from the premiums of those currently employed. With today's demographic trends - growing numbers of pensioners and a declining work force - this form of system is facing major challenges, as currently seen in France and Germany.
The 1998 pension reform brought clearer and more just rules. "The rule is plain and simple - you will get back what you put in," states Mordasewicz.
The system is made up of three pillars, of which the first two are mandatory and the third optional. For the average employee, 19.5 percent of gross salary is withheld for a future pension. Of this, 12.2 percent ends up in the publicly managed first pillar of the system, run by ZUS. The remaining 7.3 percent is put into the privately managed second pillar, which is run by the commercial OFEs. According to the 1998 reform, the current ratio is to be steadily adjusted so that, in the long-term, both ZUS and OFEs will receive equal shares of a person's salary.
While the ZUS pillar guarantees a pension based on premiums adjusted to inflation, funds in the second pillar are invested on the capital market, thus the pension can be increased by a return on investment. A maximum of 40 percent of the funds can be invested in stocks, leaving bonds the dominant investment target. "OFEs are a kind of stable-growth fund," Kossowski explained. The return on investment is usually around 10 percent in real terms. However, commission remains high - around seven percent.
"That's twice as much as in commercial investment funds," Kossowski points out. However, he is quick to add that the management costs of the OFEs are significantly lower (0.5 percent on average) than in commercial investment funds (between two and three percent on average).
Dangerous echoes
Although the system seems fair and logical, there are still some remnants of the old system. This means, in particular, industry privileges such as those for miners and their early retirements. "If we take a miner and a surgeon for instance, the latter one will get as much as he put into the system, while the miner will probably get three times as much," Mordasewicz explains. What's worse, other workers, who perform the supposedly dangerous or health-risk jobs, are also standing in line for privileges.
"Poland spends zł.20 billion on early retirees," Mordasewicz stated. "The more privileges we give, the more money from the budget goes on pensions. This means fewer funds for creating jobs," he added. The ZUS board member offered estimations suggesting that this zł.20 billion could be used to create around 200,000 jobs.
Rogala also sees early retirements as a threat to the system. "It is a solution that reminds me of the old retirement system," he said. He claimed that jobs harmful to health could have bridging pensions, with part of the pension paid from premiums and additional funds coming from the employer. "That would be OK, [but it would be] worse if the additional money came from the budget," Rogala said.
Despite the difficulties, the 1998 pension reform is seen as a success by experts. "If it wasn't for the privileges and those retirees getting pensions on antiquated terms, the system would be 100-percent healthy," Rogala posited.
Mordasewicz is worried that the privileges will be too much for the system to handle, considering the fact that two-thirds of the mandatory pensions still depend on the demographic situation and the number of people working. "If we do not increase the retirement age, the system will remain a gigantic burden for the budget," Mordasewicz says. Raising the retirement age, especially for women, is seen as a way to make up for the ageing population in the Western world.
Rogala doesn't agree that raising the women's retirement age is necessary for the system to work efficiently. "It's in the women's interest, not the system's, to raise their retirement age," PPE Konsultanci's president claims. He explains that the system pays everyone as much as he or she puts in, so it doesn't matter how long the person works. But from the person's point of view, the number of years worked makes a difference.
"Every extra year of work means an extra year of saving and one year less on a pension - financially, a double benefit." Because women retire earlier but live longer, Rogala explains, a woman starting a career after university and retiring at 60 could count on a pension amounting to about 40 percent of her average salary.
"The market will motivate women to work longer," he sums up.
The third pillar
Although the two-pillar system is seen as relatively fair and efficient, it will nevertheless never guarantee a pension at the level of one's salary. Those preparing the reform had that in mind when allowing for the optional third pillar, which allows money to be saved in individual retirement accounts (IKE). The money can be located in special saving accounts in banks, in investment funds, in brokerage houses or in insurance funds.
"Saving in the third pillar is absolutely necessary in order to have a pension at the level of our wages," Mordasewicz says. Each year of pension amounts to around one-fifth of an average year's wages, meaning that a person who retires after 40 years of work and then lives another 20 years on a pension can count on around 40 percent of his salary. Given generous interest rates from OFEs, this figure could reach 50-55 percent of the salary at most.
"It's up to a person's individual resourcefulness if, after retiring, he wants to have the standard of living that he is used to," Mordasewicz sums up.
