Winds of change
Written by Jaroslaw Adamowski
June 2012
Thirteen years after the reform that transformed Poland’s pension system and established privately-owned open pension funds (OFEs), the Polish government has unveiled plans to increase the retirement age and push forward market-oriented policies with the aim of reducing the pension system’s burden on government spending. Local analysts point that implementing the much-needed reform could improve the country’s ratings and bolster the Polish economy.
“It is expected that increasing the retirement age will strengthen Poland’s position in the international financial markets, which is of major importance in the midst of the eurozone crisis,” says Expander Advisors chief analyst Pawel Majtkowski. “Many of our neighbouring countries are undertaking or planning to take similar steps.”
“It is the most significant amendment to the pension system since defined contribution plans were introduced in Poland in 1999,” says Xelion Financial Advisors chief analyst Piotr Kuczynski. “Polish decision-makers are drawing from the experience of the German government, which decided to raise the retirement age to 67 five years ago.”
Under the pension reform plan, the retirement age will be increased to 67 years from the current 65 years for men and 60 years for women. However, the average age of retirement is actually much lower in Poland, where men retire on average after 35 years and six months of professional activity, at about 60 years, and women after 34 years and 11 months, at 59.5 years, as shown by latest figures released by the government-run Social Insurance Institution (ZUS).
As a result, Poland has one of the lowest rates of employment of persons aged 55 to 64 in the European Union, at about 37 per cent. On the brighter side, between 2004 and 2011, this rate went up from some 26 per cent.
“The average life expectancy is rapidly growing in Poland, and in several years, the labour market will be very different here,” Majtkowski says. “First noticeable and positive effects of the reform on the Polish economy will appear in five to seven years.”
Starting in 2013, the retirement age is to be raised by three months each year for men until 2020, and by nine months for women until 2040, according to a proposal submitted to the parliament by the Ministry of Labour.
Moreover, the Polish government plans to increase the amount of the contribution paid by Poles to private pension funds from the current 2.3 per cent to 3.5 per cent by 2017. Currently, some 17.22 per cent of pay is contributed to the state-owned ZUS, and the remaining part to one of the OFEs.
Since 1999, when the country’s current pension system was introduced, Poland’s private pension funds have collected about 233 billion zloty (£46.6 billion) in contributions. From 1999 to 2012, OFEs generated a return of some 59 billion zloty (£11.8 billion), according to data from the Polish private pension funds association IGTE.
On average, the total amount of contributions amassed on personal accounts in the pension funds was increasing by 5.75 per cent per year in this period, the IGTE said. Presently, 14 OFEs operate in the Polish market.
Analysts say that the latest move by Warsaw aims to bring public finances into balance all the while shifting a larger portion of pension contributions to the privately-owned funds.
“In the long term, Poland must aim to decrease the public debt to stimulate its economy, and the pension reform plan was made the cornerstone of these efforts,” argues Kuczynski.
According to the Polish government’s convergence programme, Poland’s public debt is expected to decrease to 49.2 per cent in 2013, and to 47.2 per cent in 2015.
“Next year, the public debt is very likely to fall to under 50 per cent,” said Polish Finance Minister Jacek Rostowski. “This is the beginning of a period in which the public debt will only decrease.”
Despite the financial turmoil in the eurozone, hopes for further growth over the next years are high in Poland. The International Monetary Fund (IMF) expects the country’s gross domestic product (GDP) to grow by 2.6 per cent in 2012, and a further 3.2 per cent in 2013. These positive forecasts contrast with the IMF’s predictions for the GDP of the
eurozone member states, which it expects to shrink by some 0.3 per cent this year, and grow 0.9 per cent next year.
Meanwhile, political instability could also become a key factor, as the upcoming pension reform has sparked a conflict within Poland’s ruling coalition. Prime Minister Donald Tusk’s centre-right Civic Platform (PO) has entered into a dispute with its minor coalition partner, the conservative Polish People’s Party (PSL), which opposes equalising the retirement age of men and women.
The Polish prime minister, who was sworn in for a second term in office in October 2011 after the land-slide victory of his party in the parliamentary election, has described the pension system reform as one of his cabinet’s top priorities. But without PSL’s support for the pension reform, the government could fall short of the required majority of 231 votes in the parliament, as PO has only 206 MPs in its ranks.
However, the pension reform could be saved with the help of the liberally-oriented opposition Palikot’s Movement party (RP) which has announced its endorsement for the government plans. This would most likely allow the Civic Platform to pass the pension bill even if its coalition partner decides to distance itself from the reform and withdraw its support.
The remaining right- and left-wing opposition parties have declared they would vote against the pension reform and denounced the government’s plans as unrealistic and unsustainable. Former Prime Minister and leader of the opposition right-wing Law and Justice party (PiS) Jaroslaw Kaczynski has said that his party will challenge the bill in the constitutional court if it is passed by the parliament.
“Raising the retirement age is a necessity,” Tusk said at a parliament debate. “I know this ... and we’re not expecting any support from the [opposition parties].”
That said, the biggest impediment to the government plans could be caused not by the political opposition in the parliament, but by protests organised by Poland’s trade unions, which also oppose the planned raise of the retirement age. “Various privileged professional groups will probably continue protesting against the pension reform plans throughout this year,” says Majtkowski.
Those who are least likely to endorse the proposed changes to the pension system are soldiers and police officers, who currently can retire after only 15 years of service. The pension bill proposal envisages that this minimum would be increased to 25 years, and that potential retirees from the military and police would need to be at least 55 years old at the time of their retirement, starting with those that will be accepted into the forces in 2013.
Retirement privileges for those two professional groups cost the Polish state as much as 15 billion zloty (£5 billion) per year, according to data from local employers association PKPP Lewiatan. A further 15 billion zloty (£5 billion) are allocated to finance retirement plans of Polish farmers, who, in the long term, are also poised to be integrated into the universal pension system.
Despite the protests, an increasing part of the Polish society knows that these changes cannot be avoided if Poland’s economic perspectives are not to become gloomy, according to Majtkowski.
Recent data from local opinion poll company CBOS confirms these observations. In April 2012, 79 per cent of the male respondents and 86 per cent of the female respondents were against raising the retirement age to 67 years. This, however, was down 5 per cent for both respondent groups compared with a poll conducted only a month earlier.
“All concerns should be addressed in a public debate, but this could be the last moment Poland has to fix its pension system,” says Majtkowski.
