How The Hungarian Disease Is Spreading Across Central Europe

In September of this year, Polish prime minister Donald Tusk announced his intention to undo pension system reforms and seize parts of the mandatory private pension funds. If implemented, this plan will lead to a pension fund nationalization a la Hungary under Victor Orban and Argentina under the Kirchners. The law would undo the successful achievements of the Polish transformation since 1989, which was achieved through privatization and not nationalization. The European Commission and IMF turn a blind eye to these dangerous developments. A potential chain reaction of further nationalizations needs to be stopped.

Plik Premier Tusk and George Bush 2008.JPG znajduje się w Wikimedia Commons – repozytorium wolnych zasobów

Nationalizing Polish pensions funds would not lead to sustainable fiscal consolidation and will undo Poland’s efforts over the last two decades to become a success story of growth and prosperity.

The Polish government aims to directly nationalize half of the current assets of the private pension system and will push the pension funds to invest in short term investments, which is an indicator that the government would like to keep an option to seize the remaining half of private pension assets.

Currently the Polish pension system has two pillars: the Bismarckian pay-as-you-go first pillar, that is funded by payroll contributions, and a second pillar consisting out of private pension funds. The government’s pension reform proposal includes a plan to introduce a default option for Poles to participate only in the first pillar of the pension system. Polish citizens will have to actively join the second pillar.

Behavioural psychology teaches that most people won’t sign a special declaration for joining the private pension system. This would lead to marginalization and future liquidation of the pension funds.

Even from a fiscal standpoint the nationalization will not add any structural improvements to the Polish public finances but actually worsen Poland’s debt problem: Seizing private pensions will only temporarily lower the public debt and increase unfunded liabilities in the long term. Funded pension systems are much more capable of coping with demographic changes: declining birthrates don’t have any negative impact on funded pension systems but are catastrophic for Bismarckian unfunded systems where the generation in working age pays for the pensioners. With 1.3 children per women Poland faces a huge transformation of its demographic structure – Moving away from a funded pension system will threaten the sustainability of the entire pension system.

According to economist and former Vice Prime Minister Leszek Balcerowicz, unfunded pension liabilities already exceed 193 percent of Polish GDP. Abolishing the private pillar of the pension system will grow unfunded liabilities. Taxpayers and future generations will have to bear the financial burden of Tusk’s populist decisions.

The attitude of the European Commission (EC) and of the IMF is so far very surprising. It seems that the EC is applying double standards in direct interactions with the EU member states. On the one hand it has praised Latvia for raising the contributions to the funded pension pillar. On the other hand it is so far silent about the Polish government proposal to nationalize the private pension funds’ assets.

By its behavior of not raising red flags to the Polish government and stopping a second Hungary, the EC risks jeopardizing its role as a fiscal guardian.

There is a danger that this Orbanization of the pension system policies may spread all over Europe if not counteracted. The governments in Central Eastern Europe are under pressure to slow down fiscal consolidation or retreat to fiscal stimuli. The Hungary-Polish bad example risks giving more power and additional arguments to the populist voices in the region. This is why we have to stop the Polish government proposal now and defend the private pension savings of the people.

The text was published firstly in Forbes: