Poland’s retirement reform riddled with risk

Poland’s retirement reform riddled with risk
Poles reacted with fury when the previous government raised the retirement age in 2012
By Tim Gosling in Prague November 22, 2016

Poland’s governing Law & Justice Party (PiS) has pushed a bill to lower the retirement age through parliament. The move, which reverses perhaps the only major reform success achieved by the two terms in power of the liberal Civic Platform (PO), poses risks for the budget and the economy.

On the one hand, the huge costs threaten to hit the budget and drop Poland back into the EU's Execessive Deficit Procedure. On the other, given the rising threat of a labour shortage, the reform could also hit investment and economic growth in the longer term.

The Sejm passed the bill lowering the retirement age to 65 for men and 60 for women on November 16. The legislation, which will come into force in October next year, will unravel a hugely unpopular reform in 2012 by the government led by then prime minister Donald Tusk to raise the pensionable age to 67 for both sexes.

The anger raised as Civic Platform pushed the one real systemic reform of its two terms in power through made a reversal an obvious promise for PiS as it approached elections last year. However, now in office, the conservative party is struggling to find the revenue to drive all of its populist programmes.

While there are no definite calculations of the cost, the government suggested in July the bill could hit PLN10bn (€2.3bn) - or 0.5% of GDP - per year. That’s a sum with which Moody’s Investors Service agreed on November 21 regarding 2018-19, as it branded the bill a clear “credit negative”. State social insurance institution ZUS claims the tab could rise to PLN40bn-PLN50bn.

Sluggish

“Family 500+” - a child benefit programme - was launched in July. The cost is estimated at PLN22bn in 2017. The PiS government also promised in the election campaign to raise the income tax threshold, although that move appears on hold for the meantime, as Warsaw seeks to balance its pledges against a lack of resources.

PiS proved a reasonable fiscal manager during its last stint in government in 2005-07. This time around, the ruling party has put more emphasis on spending more on social benefits.

Analysts, already watching the state budget with concern, have warned that lowering the retirement age will not only cost the budget billions, but likely result in a drop in the value of pensions. The previous government estimated that its reform would help avoid benefits cuts as high as 42% for women in the longer term.

The government hopes fast economic growth and improved collection of taxes will cover the tab, but the economy is already spluttering. GDP growth slowed to 2.5% in the third quarter, and signs suggesting October-December could also prove sluggish mean the government’s original forecast for 3.8% growth this year could be undershot by more than 1pp.

That only makes the reform more of a risk to the sovereign rating, Moody’s suggests. The move weakens public finance and undermines economic growth, and threatens to push the deficit beyond the EU threshold of 3% of GDP in 2018, the rating agency warned.

The market is already wary that Poland could slip back under Brussels’ Excessive Deficit Procedure (EDP) next year due to “Family 500+,” which is forecast to raise spending by 1.2% of GDP. One-off income from the sale of telecom licences should keep the budget gap just under the limit this year, but that boost won’t be around next year.

"This increases the risk that the fiscal deficit will exceed the 3% Maastricht target even in 2018,” writes Moody’s, which forecasts a deficit of 3.2% in 2017. That risks “Poland entering an Excessive Deficit Procedure (EDP) just two years after having exited," the analysts worry.

Vicious circle

Poland only escaped the EDP late in 2015 after several years. PiS has been desperately seeking to copy the Hungarian model by forcing large companies, mostly foreign owned, to plug the gaps. However, the bank tax introduced in February has provided less income than hoped, while a retail tax was blocked by the EU for breaking competition rules.

The hunt for revenue has put investors on edge as they eye erratic policy moves. Capital expenditure sank over 9% y/y in the first three quarters of 2016; alongside a lull in EU funding, that has done most to drag on GDP growth. That sets up something of a vicious circle, as PiS will need to hunt even harder for revenue sources.

Fitch states bluntly that the government’s “assumptions on tax revenues are too optimistic. GDP growth is likely to be lower than forecast … affecting tax revenues,” the rating agency warned earlier this year, and the macro data shows that scenario coming true. Reopening the EDP would damage fiscal policy credibility, the agency adds, worrying “it could potentially result in financial sanctions via reduced disbursements of EU funds”.

Looking further ahead, the worry is that investment - outside of public projects powered by EU funds - may slow further as the outlook clouds. Raising the retirement age “further impairs Poland’s policy credibility", Moody's says.

"Indeed, concurrent with the ongoing constitutional crisis and tensions with the European Union, this counter-reform reflects a shift in policymaking toward less-predictable and less-orthodox measures that have been associated with the new government elected in October 2015," the rating agency argues.

Bottleneck

On top of that, the lowered retirement age threatens to hit Poland at a particularly vulnerable point. The country’s poor demographic trend makes it much more of a risk, and one that spreads wider than just the state budget. The move threatens to worsen a growing labour shortage, which is seen as a risk to investment and economic growth in the medium to longer term.

The legislation will pull people out of the workforce just as Poland and the wider region is tussling with increasingly tightened labour markets. That trend is raising costs and likely to deter investment.

The “deepening problem with shortage of available labour force … [will] be amplified next year by the reduction of the retirement age,” warn analysts at BZWBK. “We are nearing the point where a lack of available workforce could become a major bottleneck for economic growth in Poland.”

With emigration still a major issue, Poland is becoming one of the fastest ageing countries in the EU. The bloc’s statistics agency Eurostat projects that the share of the Polish population aged 70 or over will rise by over 16pp to 26.4% by 2060. That is the second biggest rise in the EU, trailing only Slovakia.

The lowering of the retirement age is likely to cut 2.4mn from a workforce already reduced to 17.2mn by Poland’s poor demographics, suggests BZWBK. The analysts there estimate that a 15% decline in the working age population would deduct the same amount from GDP.

 

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