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The Warsaw Voice » Business » January 27, 2011
Business & Economy
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Pension System Reform Under Fire
January 27, 2011   
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The government’s proposals for changes to open pension funds (OFE) have met with mixed reviews. Critics claim the new measures could destabilize the pension system.

Reformed in 1999, Poland’s pension system is divided into three components, two compulsory and one optional. The first component, or pillar, run by the state Social Insurance Institution (ZUS), is based on the pay-as-you-go system—a type of “contract between generations.” This means that pensions paid out by ZUS are financed from contributions made by current employees. The second component is the open pension fund (OFE) chosen by employees, which invests funds transferred to it by ZUS every month from the contribution to the first component of the pension system. The total contribution is now 19.5 percent of the gross monthly wage; 7.3 percent of the gross wage reaches an individual account at OFE. This is the real capital that works toward the future pension. The voluntary third component, in turn, covers employee pension programs and individual retirement accounts.

This mechanism is about to change. The government plans that from the beginning of April the contribution to open pension funds will be split. For starters, open pension funds will receive 2.3 percent and ultimately, in 2017, 3.5 percent of the gross wage. The rest of the contribution (that is 5 percent to begin with) will go to an individual account managed by the Social Insurance Institution. According to the government, thanks to this, public debt will not exceed 55 percent of the country’s GDP. The government will not have to subsidize the Social Insurance Fund, which pays out pensions from the first pillar.

“This will protect the Polish people from painful cuts,” Prime Minister Donald Tusk said in the lower house of parliament. In addition, according to Tusk, OFE customers should be able to decide what portion of their money will be invested by the funds more aggressively, to enable higher profits at the expense of a higher risk, and what part “would be more conservative, stable and based to a greater extent on state debt securities.” The government has also proposed a tax break for those taking out additional voluntary insurance.

Finance Minister Jacek Rostowski said he expected a positive reaction from financial markets to the proposed changes to open pension funds. “There will be no change as far as the funds currently held by open pension funds are concerned,” Rostowski said. “The government only plans to change the way in which new contributions will be divided between OFEs, personal accounts in ZUS, and new personal accounts in ZUS. Consequently, this situation is completely different than in Hungary” where the government has proposed nationalization of the pension system.

Rostowski said he was convinced that markets would react positively because the government would accelerate the consolidation of public finances. “These measures, plus what we have already done in the budget, will make sure that as early as this year the public finance deficit will be about a third lower than last year, and next year it will be at least half that recorded in 2010,” Rostowski said.

However, not everyone is happy with the government’s proposals. According to the Polish Chamber of Commerce (KIG), the pension fund reform measures proposed by the Ministry of Labor and Social Policy are primarily aimed at reducing the current budget deficit by lowering subsidies to the Social Insurance Fund, but in the long term they mean a departure from the principle of making the pension system independent of subsidies from the state budget. This was dangerous in terms of prospects for reducing public debt and at the same time sustaining economic growth in the future, KIG said.

Experts from the Lewiatan Polish Confederation of Private Employers say the proposed changes to the pension fund system threaten to abolish the pension system in its current form. According to Lewiatan, the proposal seeks to hide part of the state’s debt by reaching for the money of the insured and passing the buck to the next governments. Lewiatan points out that moving money from pension funds to ZUS will protect the government from having to change the definition of public debt and exceeding the financial safety thresholds, but will expose future retirees to losses. “This may lead to the collapse of open pension funds and a reduction of pensions. A system developed over the past several years will thus be destroyed,” Lewiatan said.
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