Will Poland Seize Private Pension Funds?

Polish Prime Minister, Donald Tusk, wants to nationalize people’s private pension funds. Is it possible to prevent him from taking this dreadful step?

In 1999 Poland, like Hungary and other central European countries, moved from a traditional pay-as-you-go (PAYGO) defined-benefit pension system to a defined-contribution system, combined with a mandatory retirement savings plan operated by private pension funds. Unfortunately, Tusk now wants to repeat the mistake Hungary made in 2010, when Prime Minister Victor Orban nationalized private funds’ assets.

foto: friendsofeurope/ http://creativecommons.org/ licenses/by/2.0/

Poland should reject Orban’s flawed vision of economic salvation through government control.

The original Polish reform was a response to the aging of the population, as well as a way to strengthen economic growth through increased saving. Most of the cost of the transition was to be covered by revenues from the privatization of state-controlled assets and government spending reforms. However, privileges for certain professional groups seriously compromised the new system.

The pension reform had wide support. It was created and implemented by two successive governments, and later governments, including those of the post-socialists and the coalition of the conservative Law and Justice (PiS) and populists, left private funds alone. Even during the economic slowdown of the early 2000s, private pension funds were untouched.

Payments to the funds continued during the first four years of the coalition government led by Tusk’s Civic Platform (PO) party. Thus, the government shocked the country in late 2010, when it accused pension funds of being the main cause of the growing public debt. The funds were also criticized for charging excessive fees – even though the government imposes a ceiling! – and even for being private.

In addition, investment by private pension funds in government bonds was condemned and, inexplicably, described as a “cancer.” Despite protests from many economists and much of the media, in 2011 this campaign led to a mandated cut in employee contributions – from 7.3 to 2.3 percent of gross salary, although with a promised increase to 3.5 percent by 2017.

This year the government has started a new aggressive campaign against private funds based on the same accusations. Now, as with Orban in Hungary and the Kirchners in Argentina, the target includes the funds’ accumulated assets. In September Prime Minister Tusk proposed:

  • to nationalize the assets invested in government bonds (slightly above 50 percent of the total). Together with a ban on future bond purchases, this would turn the funds into high-risk entities, making their liquidation politically easier in the future.
  • to transfer the assets to the PAYGO part of the system 10 years before an individual reaches the official retirement age. This is another form of asset nationalization.
  • to change the law so that employees could contribute to a private pension fund only by specifically choosing that option. If they failed to do so, all their contributions would go into the public plan. Behavioral psychology teaches us that most people will stay with the default setting rather than opt for an alternative. Thus, this proposal could marginalize the funds and lead to their liquidation.

The changes proposed by the government have met with a fierce resistance from economists and other experts, because the campaign against the funds is clearly demagogic, and the nationalization threat conflicts with Poland’s successful transformation from communism, which has been based on privatization since 1989. The Civic Platform could pay a heavy political price because of its unpopular proposals.

Although Orban’s policy in Hungary was widely criticized in the EU, there is surprisingly little comment about the Polish government’s plans. This is ominous because the Orbanization of pension systems may spread to other countries if not counteracted. Governments in the region are under pressure to reverse their fiscal austerity and to ramp up stimulus spending. The bad examples of Hungary and Poland may give more power and propaganda to populist voices. Orban’s statist policies caused many Hungarians to lose their sense of private property. This story must not be repeated in Poland.