Poland saves on pensions to cut budget deficit

Pensions 9June2010.JPG

Controversial pension reform adopted by the Polish parliament last Friday (25 March) has met with criticism from employers' federations and business circles. EURACTIV Poland reports.

The pension reform, adopted by the lower house of the Polish parliament, slashes from 7.3% to 2.3% the proportion of an individual's salary that can be paid into private pension funds.  

The 5% difference will be paid into Poland's national social security scheme, or ZUS.

The reform was passed by 237-154 votes amid 40 abstentions.

The government has said the move is crucial to enable the state to keep paying out pensions from the indebted ZUS scheme's coffers, thus reducing pressure on the state budget.

The reform will save the state 195 billion zloty (48 billion euros) by 2020, according to the government.

The law must still be approved by the Senate and signed off by President Bronislaw Komorowski, a key ally of Prime Minister Donald Tusk. The government hopes to have it in force by 1 May.

Last reformed in 1999, Poland's pension system is divided into three pillars, two of which are compulsory and one optional. The first pillar, run by the 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 employees.

The second pillar 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.

Savings

Finance Minister Jacek Rostowski said he expected financial markets to react positively 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 is quoted by Rzeczpospolita daily as saying.

In Hungary, the government has nationalised its pre-funded pension schemes in a bid to slash the budget deficit (see 'Background'). But Rotowski insisted the situation was different there.

"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," Rostowski said.

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.

Not everyone is happy with the government's proposals.

According to the Polish Chamber of Commerce (KIG), the pension fund reform measures 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 Polish Confederation of Private Employers Lewiatan say the 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 grabbing the money of the insured and passing the buck to future governments.

The confederation also points out that moving money from pension funds to ZUS will protect the government from having to change the definition of public debt and exceed 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 states, quoted by the Warsaw Voice.

At an EU summit in October 2010, a group of nine EU member states from the former communist bloc demanded that the cost of reforming their costly pension systems be taken into account when calculating their public debt and deficit.

The call was supported by Poland, Bulgaria, the Czech Republic, Hungary, Latvia, Lithuania, Romania and Slovakia as well as Sweden.

However, they failed to secure a majority to get their proposal through.

Struggling with budgetary pressure at home, Hungary has nationalised its pre-funded pension schemes and excluded the cost of the reforms from their public debt figures. Bulgaria has taken measures in the same direction.

The so-called Stability and Growth Pact for the euro sets a ceiling of 3% of gross domestic product (GDP) on government deficit and 60% of GDP on public debt.

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