Gora: Security is fundamental
One of the crucial changes in the system is that individuals now become aware of what they contribute to their retirement as well as get involved in which funds will manage that money, opposed to simply flowing tax payments to the deficit-ridden Social Insurance Office (ZUS). The WBJ's Anna Kocinska talked to Gora about how Poles are perceiving this drastic change and what issues are already causing concern. Following is an edited, translated version of their conversation.
Q: Are people ready for the deep structural changes that pension reform is bringing? The chaos health care reform caused shows how difficult it is to implement change in a previously centrally planned society.
A: There is nothing to be immediately adjusted to as there are no immediate effects for the insured. This reform differs from other reforms currently being implemented. It is not that we will introduce the reform today and tomorrow we will be able to see its results. The results will be created year-by-year by the participants of the system. Generally speaking, the reform does not result in changes that would disrupt everyday life. Its effects are delayed over time.
Q: Is this system safe? What makes it safer than a scheme based exclusively on capital markets?
A: Security is the fundamental concept underlying the new system. It was our very first goal when we started working on the reform. There are three levels of security. First of all, the new system does not generate any payments due that would exceed their financial liquidity. By its definition it cannot make up a deficit, unlike the old system. This is something that differs between the two systems. The old one would give empty promises guaranteed by the state in the way that the government could always take more from our personal taxes to finance the deficit that in turn could make the system pay what was due.
The system's division into two mandatory pillars and the voluntary third one that complements the system, is how the second level of security is achieved. Participating in two pillars diversifies the risk to which our money is exposed. By following the rule 'don't put all your eggs into one basket,' it's like having two accounts instead of one. Since the different pillars can perform better or worse in different periods of time, participating in more than one pillar is always more stable than staying in one.
The third level of security implies that if we introduce private funding (pension funds) in the second pillar, some kind of control over them must be provided. Since the participation in the second pillar is mandatory, there must be a security guarantee, in effect, legal regulations that will make investing our money safe.
Q: Aren't the fees established by the new pension funds, from 8.0% up to 15% too high? Why are they so high when compared to Hungary where they average about 5% or, in the case of a U.S. mutual fund, are usually less than 2%?
A: I am afraid they could be too high but this is a signal for us which funds one should choose, not necessarily the most expensive ones, but at the same time not necessarily the cheapest ones either. It's a factor that should influence our choices. I agree, the rate of the fee will have a colossal influence on the return rate of pension funds, the more so since what interests us is the net return rate after all the costs, such as management fees (paid from the fund's assets) or the fees for the depository (holding the fund's assets). On the other hand, the market is open. Entering it is not limited so if it's possible to do it cheaper, somebody will do it cheaper.
Q: Doesn't it seem that the funds are intentionally making the fees high because they have a captive group of investors who have no choice but to invest into one of the funds?
A: I don't think we have a situation where profit is lower because of some kind of monopoly on the market. There is no licensing on the market; anybody who meets the criteria can enter it. If all the players are expensive, somebody will offer half the price. Besides, there are many South American countries where the fees are much higher.
Q: There is a plan to cut the current contribution rate, which is also one of the reform's major tasks. How are you going to achieve that? Why not cut the contribution rate quickly and dramatically so that people and companies would not have a reason to avoid it?
A: It is not that simple. The contribution rate has to be cut and that's not questionable. It's one of the reform's main goals, but it can't be done now because we have to maintain the old system (for people over 50) and guarantee payments to our parents and grandparents. What the new system does, however, is diminish the motivation to hide one's own revenue. Today, unlike under the old system, if an employer doesn't pay his share of the contribution it doesn't mean that together with the employee they are fooling the rest of society; his evading only affects the employee. So, it's a completely new situation in which hiding real earnings no longer works for both employer and employee. By hiding his real earnings, the employee loses the chance to finance his pension. So he gets more money today but he won't get that much tomorrow.
Q: Additional years of work will be rewarded with better pension benefits. Why then, is the minimum pension age for women 60 and for men it's 65?
A: It's a system shortcoming because the five-year difference in the pension age may affect women. When under the old system it was a privilege to retire earlier because one could get a bigger bite of the cake earlier, in the new system earlier retirement means that we start using our own money earlier. It's not a privilege anymore then. So, those who want to protect women due to their special role in society should not do it by lowering their pension age. It will change. In five, maybe eight years somebody will change that law, no doubt about that. We don't need to rush that, though.
Q: Are people ready for the deep structural changes that pension reform is bringing? The chaos health care reform caused shows how difficult it is to implement change in a previously centrally planned society.
A: There is nothing to be immediately adjusted to as there are no immediate effects for the insured. This reform differs from other reforms currently being implemented. It is not that we will introduce the reform today and tomorrow we will be able to see its results. The results will be created year-by-year by the participants of the system. Generally speaking, the reform does not result in changes that would disrupt everyday life. Its effects are delayed over time.
Q: Is this system safe? What makes it safer than a scheme based exclusively on capital markets?
A: Security is the fundamental concept underlying the new system. It was our very first goal when we started working on the reform. There are three levels of security. First of all, the new system does not generate any payments due that would exceed their financial liquidity. By its definition it cannot make up a deficit, unlike the old system. This is something that differs between the two systems. The old one would give empty promises guaranteed by the state in the way that the government could always take more from our personal taxes to finance the deficit that in turn could make the system pay what was due.
The system's division into two mandatory pillars and the voluntary third one that complements the system, is how the second level of security is achieved. Participating in two pillars diversifies the risk to which our money is exposed. By following the rule 'don't put all your eggs into one basket,' it's like having two accounts instead of one. Since the different pillars can perform better or worse in different periods of time, participating in more than one pillar is always more stable than staying in one.
The third level of security implies that if we introduce private funding (pension funds) in the second pillar, some kind of control over them must be provided. Since the participation in the second pillar is mandatory, there must be a security guarantee, in effect, legal regulations that will make investing our money safe.
Q: Aren't the fees established by the new pension funds, from 8.0% up to 15% too high? Why are they so high when compared to Hungary where they average about 5% or, in the case of a U.S. mutual fund, are usually less than 2%?
A: I am afraid they could be too high but this is a signal for us which funds one should choose, not necessarily the most expensive ones, but at the same time not necessarily the cheapest ones either. It's a factor that should influence our choices. I agree, the rate of the fee will have a colossal influence on the return rate of pension funds, the more so since what interests us is the net return rate after all the costs, such as management fees (paid from the fund's assets) or the fees for the depository (holding the fund's assets). On the other hand, the market is open. Entering it is not limited so if it's possible to do it cheaper, somebody will do it cheaper.
Q: Doesn't it seem that the funds are intentionally making the fees high because they have a captive group of investors who have no choice but to invest into one of the funds?
A: I don't think we have a situation where profit is lower because of some kind of monopoly on the market. There is no licensing on the market; anybody who meets the criteria can enter it. If all the players are expensive, somebody will offer half the price. Besides, there are many South American countries where the fees are much higher.
Q: There is a plan to cut the current contribution rate, which is also one of the reform's major tasks. How are you going to achieve that? Why not cut the contribution rate quickly and dramatically so that people and companies would not have a reason to avoid it?
A: It is not that simple. The contribution rate has to be cut and that's not questionable. It's one of the reform's main goals, but it can't be done now because we have to maintain the old system (for people over 50) and guarantee payments to our parents and grandparents. What the new system does, however, is diminish the motivation to hide one's own revenue. Today, unlike under the old system, if an employer doesn't pay his share of the contribution it doesn't mean that together with the employee they are fooling the rest of society; his evading only affects the employee. So, it's a completely new situation in which hiding real earnings no longer works for both employer and employee. By hiding his real earnings, the employee loses the chance to finance his pension. So he gets more money today but he won't get that much tomorrow.
Q: Additional years of work will be rewarded with better pension benefits. Why then, is the minimum pension age for women 60 and for men it's 65?
A: It's a system shortcoming because the five-year difference in the pension age may affect women. When under the old system it was a privilege to retire earlier because one could get a bigger bite of the cake earlier, in the new system earlier retirement means that we start using our own money earlier. It's not a privilege anymore then. So, those who want to protect women due to their special role in society should not do it by lowering their pension age. It will change. In five, maybe eight years somebody will change that law, no doubt about that. We don't need to rush that, though.
