Poland's politics get personal over pensions

By bne IntelliNews October 18, 2013

Jan Cienski in Warsaw -

The accounting consequences of changes to a two-tier pension scheme do not sound like something that can get political pulses racing - but the Polish government's plan to radically change the retirement system has set off a bitter fight, largely among people who would otherwise be backing the centre-right administration.

Recent weeks have seen the finance minister Jacek Rostowski attacking Leszek Balcerowicz, the architect of Poland's post-communist economic reforms, while relations between Donald Tusk, the prime minister, and Jerzy Buzek, a former premier and now European MP, have soured.

The reason is that Tusk is planning on undoing some of the pension system reforms instituted in 1999. Under that scheme, part of workers' obligatory social security deductions were funnelled into funds managed by private firms - the so-called second pillar, or OFE. But starting from next year the funds will have to hand over their holdings of government bonds - just over half of the assets they manage.

Furthermore, workers will have a choice as to whether to keep part of the pensions with the funds or to switch completely to the state-run ZUS system. The government insists that pensioners will not be harmed in the shift from having their assets in state bonds to relying on government promises to pay their pensions.

The result will see Poland's public debt drop by about 8 percentage points to about 47% of GDP - crucial as public debt was brushing against a legal threshold of 55% of GDP. The government also gains some much-needed fiscal space that could see a boost in investments and subsequently faster growth.

However, many analysts foresee the rump OFE funds shrivelling and dying over the next few years, and equity investors are upset because the Warsaw Stock Exchange will lose the so-called "pension premium" that had boosted stock prices on the WSE.

Slavic shrug

Outside of Poland, however, the general reaction has been a shrug. "Although these changes will hurt domestic capital market liquidity and increase the government's pension-related contingent liabilities, government finances will benefit in the short-term," notes Moody's Investors Service, the rating agency.

James Roaf, the International Monetary Fund's (IMF) representative for Central and Eastern Europe, told Reuters: "We are not taking a position whether this [OFE reform] is the right thing to do or not. But we certainly do not see a concern."

Rolling back pension reforms has also caused Tusk little political grief at home, because Law and Justice, the leading opposition party, has never been particularly enamoured of the OFE funds. Jaroslaw Kaczynski, the party's leader, has called the OFE scheme "one great scam". Leszek Miller, leader of the ex-communist Democratic Left Alliance, several of whose members helped create the OFE system, now calls it a "devilish scheme".

That has left a group of commentators and economists, largely gathered around Balcerowicz, to take the lead in attacking the government for gutting the OFE system.

Balcerowicz, never a man to shy away from a fight, has led the charge. He accuses Rostowski of "an attack on the savings of Poles. I've known him for so many years, but I never thought he'd be capable of that." He has said that this move is storing up long-term trouble for Poland's public finances, comparing Poland's prospects to those of Greece.

Balcerowicz has received support from an unexpected quarter. Buzek, a member of Tusk's own Civic Platform party as well as one of the country's most popular politicians, has denounced the changes to the OFE system, one of the signature achievements of his 1997-2001 term as prime minister. "The government's OFE proposal does not guarantee a long-term improvement in public finances nor the economic security of the insured. It is a proposal that is harmful to the Polish economy," he wrote in a public appeal.

A nonplussed Tusk responded by saying that Buzek and Balcerowicz were being swayed by their emotional attachment to the OFE system as they were in part its creators. The tone went down from there.

Balcerowicz fired back that "Tusk avoids the truth" and denounced the patronising tone of the prime minister's response, calling arguments in favour of changing the system "dishonest propaganda techniques". Rostowski, who has revelled in a series of high-profile fights with Balcerowicz, his former mentor, in recent years, charged him of doing all he could to "torpedo rational, careful and well considered solutions", and then accused him of being in cahoots with the funds managing the OFE system. Buzek, a normally unruffled politician, tweeted that Rostowski's comments were "scandalous and below acceptable standards".

Ties between Buzek and Tusk are now visibly strained, while Balcerowicz and other economists continue to accuse the government of dishonesty.

This fight is not helping Tusk as he tries to recover from a slump in the opinion polls that has seen Law and Justice overtake his Civic Platform party. And the personal nature of the bickering has also done little to elevate Polish politics. Few expect it to get any better until the next parliamentary election scheduled for 2015, though Tusk has said the next one could happen sooner if his government loses its majority in parliament, which is already super thin after several MPs defected.

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