Some Polish on pensions

By bne IntelliNews April 8, 2011

Jan Cienski in Warsaw -

The Polish government's bruising battle over reforming the pension system - part of its plan to rescue strained public finances - has come to a close as Bronislaw Komorowski, the president, on April 7 signed into law legislation that largely undoes pension reforms undertaken a decade ago.

The legislation was raced through parliament with such speed that it has aroused concerns of constitutional scholars, but the government of Prime Minister Donald Tusk felt it had little choice but to enact deep changes that it says will save Poland from crossing its self-imposed public debt limit of 55% of GDP. Last year, debt hit 53% of GDP. "If the pension system is not changed or corrected, there are no cuts which could equalise the growing debt," Tusk told parliament.

The law enacted by parliament would cut the money flowing to private pension schemes from 7.3% of a workers salary to 2.3%, with the remainder going into the public pension system to pay for the cost of providing for current pensioners.

The change would reduce the deficit by 0.8 percentage points this year and by 1.7 percentage points in 2012 - making it easier for the government to meet its promise of reducing the deficit from 7.9% of GDP last year to 3.0% of GDP by 2012. Tusk says that as a result, the government will be able to reduce its borrowing by PLN190bn (€47bn) to 2020.

Hard sell

Jacek Rostowski, the finance minister, was dismayed by the pension system because it was largely funded by debt. Essentially, the government would borrow to pay workers' contributions to the private pension system, and the investment funds running those schemes would then take more than two-thirds of the money pouring into the system and buy government bonds - a transaction that Rostowski called a "cancer" on public finances.

The problem was that when the pension scheme was set up in 1999, it was supposed to be funded not by borrowing, but through revenues generate by selling off government assets. However, privatisation proceeds came to less than expected and a lot of the money was absorbed to cover current needs. Further, subsequent governments let influential groups like miners and teachers escape the pension system into their own more lucrative plans, which blew a hole in the assumptions behind pension reform.

However, the government did a clumsy job of selling these pension reforms, with some ministers saying they were needed in order to help public finances, while others said they were designed to fix a broken system.

The changes created the most severe political problems for Tusk since he was elected in 2007 - and not from the generally hapless opposition but from a group of leading economists gathered around Leszek Balcerowicz, the architect of the shock therapy reforms that created a market economy after the fall of communism in 1989. Turk's Civic Platform party saw some of its support fall away, increasing worries about its prospects in this autumn's parliamentary elections.

Balcerowicz hammered the reforms as being based on "false propaganda" that would end up harming future pensioners. Balcerowicz even sparred with Rostowski in a televised debate in March, a contest where the finance minister was widely seen as having come off the winner.

Many analysts were especially worried that the government was using the pension changes to dodge more politically difficult reforms before elections. "Fitch has become increasingly concerned about the deteriorating trend in Poland's public finances and a failure to implement sustained fiscal consolidation could lead to negative rating action," said the ratings agency.

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