Keeping up with the changing changes in pension reform
This is of course an advantage, as it avoids my long suffering secretary Gosia taking messages from an irate editor saying, "Where's The Column?" This also enables me to avoid the shining wit of our editor who always finds new and incisive ways to get the message across.
I know The Column is only once every two weeks, but it seems to come around very quickly, no sooner has it appeared than I have to think about the next one, trying to sound knowledgeable and topical about yet another new subject.
This week I need to sound knowledgeable about the pension laws again. This is because of my forced absence from the office tomorrow, which is last Wednesday by the time you read this (or the Wednesday before if you're last on the circulation list or on a plane), so I can attend another one of those conferences organized by those nice people at Euroforum to talk about changes in the pension legislation coming next year. And, of course, I'll be, or was, talking about the tax implications for the individuals and the funds.
While it's nice to be asked, I always worry that it means that there's less scope for me to learn something new. However, such is the speed of development that my original intention to cannibalize my last speech on the same subject was superseded by events, so it was research time for this columnist.
Never wishing to miss an opportunity to leverage research into several formats, here's the hot news on what's happening in the pension reform process.
Even those who missed the last column on the subject have probably realized by now that come Jan. 1, 1999 the pension process is to be reformed, to enable those dreaded social security (ZUS) contributions to be capped, and the money saved to be channeled into a funded pension scheme.
ZUS is currently 45% for pension, 3% for unemployment insurance and 0.15% for the Fund for Guaranteed Payments to Employees, which bails out back-salary to employees of bankrupt enterprises. The changes affect the 45% part of it.
Everyone seems to agree that this is a Good Thing, because people will no longer have to rely on state provision, and the savings in the funds will free up billions of zloty over the next years to develop the capital markets in Poland as these savings go looking for a home.
The basic system is of three pillars, one the existing "Pay As You Go" minimum system, one a private, funded, second pillar, and a third pillar of additional contributions where an individual or his employer can top up pension savings with extra cash deposits.
The interesting area is the detailed provisions of the laws that are now being published, implementing in detail what was previously known in principle.
This week's shock was in the area of what we tax types call grossing-up. At the moment, all ZUS contributions are paid by the employer, so the employee does not "see" any contribution or payment into his retirement fund. The plan is for the basis to change, so that 23% of base salary is paid by the employee, and 22% by the employer.
So anyone earning a salary of zl. 1,000 per month, on top of which the company pays zl. 450 of ZUS will now earn zl. 1,230, of which they have to pay zl. 230 in ZUS. The company pays another zl. 220 on top, making zl. 1,450, same as before.
We're assuming the average salary is almost exactly zl. 1,000 at present, which makes the above example dead simple and close enough to be true. It also makes the cap zl. 2,500 per month, or as it is expressed elsewhere zl. 30,000 per year.
Now, the law has to be changed to say that your employer will quote your salary as zl. 1,230 instead of zl. 1,000. Where this gets interesting is above the contributions limit.
The cap on contributions should apply at a level of 250% of the average salary in the economy. Now, instead of just assuming a figure of zl. 1,000 as being about that, and indexing the figure for salary index changes each year, the government proposes an estimate that is reconciled each year to the actual salary at the end of the period, and any excess refunded, or undercontribution collected.
Also, the limits are now expressed as an annual limit of 30 times the monthly salary, rather than 12 times 250%. This leads me to suspect that you have to pay your full ZUS contributions early in the year, and once you go over the cap enjoy a net pay increase as further contributions become unnecessary.
Why is this necessary when this is a long-term savings plan and over- and under-funding can be corrected by adjusting the contribution base next year, and when a monthly limit can also be applied to contributions? Beats me, but that is how the law currently stands.
Additionally, the newspapers last week contained an interesting example table of the grossing-up for individual salary levels, similar to my simplified table above. Now, below the contribution cap, the gross-up is simple, 23% of salary. Above the cap, the gross-up should be 23% of the cap, and not 23% of the total.
However, all the tables in the papers this week grossed-up by 23% of the total. Needless to say my confusion will probably be rectified by some worthy person tomorrow, but I'll have to tell you the answer in the next column.
Making the gross-up 23% of the total, and then capping contributions leads to pay increases for the higher paid. While I'm in favor of that, as I do admit to earning more than zl. 2,500 per month, I don't think that's the intention of the law. And I think most employers are expecting the rebate from the cap to come to them, same as they would have been the ones to pay when things were increased.
Being in the middle of designing employer pension schemes for Polish employers when it's not even possible to be certain about how the gross-up is going to be applied makes it very interesting.
We are working on a conference for clients to explain the changes, but when even the changes keep changing, and when the reports of the legislation as it is issued differ from what is expected, I think it's too early. There's more scope to confuse people now by trying to explain it as definitive when it simply isn't, and the cost of the confusion is, I think, too high.
Instead you can safely assume that Tax Watch will be returning to this subject, where we can cover it in bite-sized chunks of ideas, small enough to consume in handy, biweekly installments. Then we'll hire a big room and a few paczki and invite our clients in to explain it once the final position is clear some time after summer. Luckily I didn't have any vacation plans ...
Peter Ferrigno is a tax manager in the Warsaw office of Arthur Andersen.
I know The Column is only once every two weeks, but it seems to come around very quickly, no sooner has it appeared than I have to think about the next one, trying to sound knowledgeable and topical about yet another new subject.
This week I need to sound knowledgeable about the pension laws again. This is because of my forced absence from the office tomorrow, which is last Wednesday by the time you read this (or the Wednesday before if you're last on the circulation list or on a plane), so I can attend another one of those conferences organized by those nice people at Euroforum to talk about changes in the pension legislation coming next year. And, of course, I'll be, or was, talking about the tax implications for the individuals and the funds.
While it's nice to be asked, I always worry that it means that there's less scope for me to learn something new. However, such is the speed of development that my original intention to cannibalize my last speech on the same subject was superseded by events, so it was research time for this columnist.
Never wishing to miss an opportunity to leverage research into several formats, here's the hot news on what's happening in the pension reform process.
Even those who missed the last column on the subject have probably realized by now that come Jan. 1, 1999 the pension process is to be reformed, to enable those dreaded social security (ZUS) contributions to be capped, and the money saved to be channeled into a funded pension scheme.
ZUS is currently 45% for pension, 3% for unemployment insurance and 0.15% for the Fund for Guaranteed Payments to Employees, which bails out back-salary to employees of bankrupt enterprises. The changes affect the 45% part of it.
Everyone seems to agree that this is a Good Thing, because people will no longer have to rely on state provision, and the savings in the funds will free up billions of zloty over the next years to develop the capital markets in Poland as these savings go looking for a home.
The basic system is of three pillars, one the existing "Pay As You Go" minimum system, one a private, funded, second pillar, and a third pillar of additional contributions where an individual or his employer can top up pension savings with extra cash deposits.
The interesting area is the detailed provisions of the laws that are now being published, implementing in detail what was previously known in principle.
This week's shock was in the area of what we tax types call grossing-up. At the moment, all ZUS contributions are paid by the employer, so the employee does not "see" any contribution or payment into his retirement fund. The plan is for the basis to change, so that 23% of base salary is paid by the employee, and 22% by the employer.
So anyone earning a salary of zl. 1,000 per month, on top of which the company pays zl. 450 of ZUS will now earn zl. 1,230, of which they have to pay zl. 230 in ZUS. The company pays another zl. 220 on top, making zl. 1,450, same as before.
We're assuming the average salary is almost exactly zl. 1,000 at present, which makes the above example dead simple and close enough to be true. It also makes the cap zl. 2,500 per month, or as it is expressed elsewhere zl. 30,000 per year.
Now, the law has to be changed to say that your employer will quote your salary as zl. 1,230 instead of zl. 1,000. Where this gets interesting is above the contributions limit.
The cap on contributions should apply at a level of 250% of the average salary in the economy. Now, instead of just assuming a figure of zl. 1,000 as being about that, and indexing the figure for salary index changes each year, the government proposes an estimate that is reconciled each year to the actual salary at the end of the period, and any excess refunded, or undercontribution collected.
Also, the limits are now expressed as an annual limit of 30 times the monthly salary, rather than 12 times 250%. This leads me to suspect that you have to pay your full ZUS contributions early in the year, and once you go over the cap enjoy a net pay increase as further contributions become unnecessary.
Why is this necessary when this is a long-term savings plan and over- and under-funding can be corrected by adjusting the contribution base next year, and when a monthly limit can also be applied to contributions? Beats me, but that is how the law currently stands.
Additionally, the newspapers last week contained an interesting example table of the grossing-up for individual salary levels, similar to my simplified table above. Now, below the contribution cap, the gross-up is simple, 23% of salary. Above the cap, the gross-up should be 23% of the cap, and not 23% of the total.
However, all the tables in the papers this week grossed-up by 23% of the total. Needless to say my confusion will probably be rectified by some worthy person tomorrow, but I'll have to tell you the answer in the next column.
Making the gross-up 23% of the total, and then capping contributions leads to pay increases for the higher paid. While I'm in favor of that, as I do admit to earning more than zl. 2,500 per month, I don't think that's the intention of the law. And I think most employers are expecting the rebate from the cap to come to them, same as they would have been the ones to pay when things were increased.
Being in the middle of designing employer pension schemes for Polish employers when it's not even possible to be certain about how the gross-up is going to be applied makes it very interesting.
We are working on a conference for clients to explain the changes, but when even the changes keep changing, and when the reports of the legislation as it is issued differ from what is expected, I think it's too early. There's more scope to confuse people now by trying to explain it as definitive when it simply isn't, and the cost of the confusion is, I think, too high.
Instead you can safely assume that Tax Watch will be returning to this subject, where we can cover it in bite-sized chunks of ideas, small enough to consume in handy, biweekly installments. Then we'll hire a big room and a few paczki and invite our clients in to explain it once the final position is clear some time after summer. Luckily I didn't have any vacation plans ...
Peter Ferrigno is a tax manager in the Warsaw office of Arthur Andersen.
