Poland's govt becomes unstuck over pensions

By bne IntelliNews February 11, 2011

Jan Cienski in Warsaw -

The accounting consequences of reformed pensions may not sound like a subject that gets pulses racing, but it has become the leading political debate in Poland, and is one of the causes of the recent drop in support for the ruling Civic Platform party.

The reason is that Poland's government has been backed up against a wall thanks to a steeply rising budget deficit - likely just over 8% of GDP last year - and a public debt that the government says is just shy of a legal threshold of 55% of GDP. Jacek Rostowski, the finance minister, has promised to bring down the deficit to the 3% of GDP prescribed by the EU by no later than 2013, all while ensuring that debt does not rise higher than it is now. That means Rostowski has to cut spending or raise taxes by about PLN90bn (€23bn) over the next three years, a task made even more difficult by parliamentary elections scheduled for this autumn, which increase the political risk of unpopular measures.

Thus, the government has decided to tweak the pension system as a way of finding the cash to keep public finances from spinning out of control.


Poland reformed its pension system in 1999, moving away from the pay-as-you go scheme common in most countries - where current wage earners pay the pensions of current retirees - to a mixed system that sets aside some of the pension contributions of current workers into personal accounts - called the second pillar - managed by private pensions funds that today's workers will cash out when they retire.

Reforming the pension system is a more honest way of accounting for future pension debt - something that countries like France or Germany, with unreformed pension systems, keep hidden. But Eurostat, the EU's statistical agency, has refused to change the way it counts the debt and deficit of countries with reformed pension systems. As a result, Hungary's newly elected populist government has scrapped the second pillar of the pension system, moving the funds located there back into the public system, and saving itself from a budgetary crisis.

Poland's government, faced with a similar fiscal problem, wants to cut the amount of money flowing into the private system from 7.3% of workers' salaries to 2.3%, something that Rostowski says will shave 0.6 to 0.7 percentage points off the public debt.

Rostowski has come out as a determined foe of the current system, saying that the private pensions are a fiction because the money flowing into the second pillar is borrowed by the government, as the costs of creating a parallel pension system were miscalculated by its creators a decade ago. In a recent article, Rostowski called the second pillar "a cancer on [pension reforms] which has grown to gigantic proportions and is destroying the pension system, and has now thrown itself on the public finances."

However, the government's new policy has alienated many of its formers supporters, particularly in business and among high-profile economists.

Leading the charge is Leszek Balcerowicz, a former finance minister and central bank governor who was the architect of economic reforms in the early 1990s that created a market economy in Poland. He has lambasted Rostowski and Prime Minister Donald Tusk for lacking the political courage to undertake meaningful economic reforms, and instead choosing to destroy the pension system. "The main reason for Poland's slower economic growth is the chronic illness of public finances," says Balcerowicz, who has become the government's leading opponent largely because the parliamentary opposition parties are so inept.

His warnings are echoed by other economists. "Rostowski's plan holds together, but only if all the optimistic assumptions it makes are fulfilled," say Jerzy Hausner, a former economy minister, and Miroslaw Gronicki, a former finance minister.

The unease provoked by the government's idea is spreading, and now Rostowski acknowledges that pensions changes planned for April may actually happen in May, while others predict the whole package will be sent to the constitutional tribunal to see if it is legal.

The government's normally sure-footed public relations machine has also come unstuck, with ministers contradicting each other over changes to the pension plan. As a result, Civic Platform has begun to drop in the opinion polls, and analysts have been considering scenarios that just a few weeks ago would have seemed ludicrous - that Civic Platform may not form the next government.

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