open pension funds : a part of social security in poland

Open Pension Funds:A Part of Social Security in Poland

Marek GóraWarsaw School of Economics

FIAP conference, Warsaw, May 2009

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Initial comments The new system replaced the old one on 1st Jan

1999. The old one was terminated. The entire new system is based on DC regime in

accumulation phase and annuitization in the payout phase.

The new system remains a part of social security irrespective to public or private management of its parts.

The new system is similar to the new Swedish system (launched on the same day as the Polish one).

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Key goal of the new system

Providing entire working population with a secure method of income allocation that involves the least part of their disposable income.

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Goals of the new system (entire)

Intergenerational equilibrium (equally valuated welfare of all generations; GDPR/GDP=const.).

Diversification of risk (better absorption of financial and economic shocks – Security through Diversity).

Individual instead of anonymous participation.

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Effects of the new system implementation

The system is transparent at both individual and macro levels.

The system automatically adjusts ex ante instead of discretional adjustment ex post.

Pension system debt ceased to increase above ability of the system to serve the debt without a need to increase contributions or taxes [PV(B)=PV(B)].

Production factors remuneration growth is not constraint by growing pension expenditure .

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Intergenerational equilibrium

GDP1

GDP2

GDP1T1

R1 R2

T2

R2/GDP2 = R1/GDP1

R2/GDP2 < R1/GDP1

or

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Common misunderstandings Implementation of pension funds (OFE) was not

the essence of the reform. Pension societies are private but pension funds

they manage are public, which is a kind of PPP. Entire new system based on individual accounts. ZUS is a public pension society that does not

use financial markets. Benefits (in terms of the replacement rate) do

not depend on any particular type of pension system (z = c/d; where: d=LR/LW).

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Current disputes

Public discussion is focused on the OFE/PTE part of the system that is the most „sexy” for politicians and the general public.

The micro perspective dominates while the macro perspective is commonly lacking.

Costs of participation (contributions) vs. costs of service (fees) [„elephant” and „ant”].

The crisis vs. the long-term goal of the system. Rates of return in both parts of the system. First payouts.

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Diversification of risks

The finansial crisis provides the best justification for the decision to split the new system into two parts of which one is directly linked to the real economy (NDC accounts) and the other one (FDC accounts) is linked to the real economy via financial markets.

For a couple of years rates of return in the FDC part of the system were higher, while now rates of return in the NDC part are higher. That pattern will repeate many times in the future.

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First payouts

The entire new system pays one benefit. It can be broken into parts, namely:

A part based on the initial capital left over by the previous (terminated) system [this part will disappear in the future];

An NDC based part; An FDC based part.

Focusing on particular parts may be interesting but can also mislead the public, which is exactly the case in Poland now.

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Benefits (replacement rate)

WLwcD

RLwzS dcz

1

)(W

R

LL

d

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Regulatory adjustments

Ongoing adjustments of regulations are and will be necessary.

Regulatory adjustments do not (should not!) change the principles.

The adjustments should contribute or be neutral to the social goal of the system.

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Priorities of activities regarding the pension system

First, from the direct participants’ viewpoint: Large scale public education; Creation of pre-retirement subfunds; Fee level and structure (including separate regulations

on fee parts financing PTE servicies and other parties’ servicies).

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Priorities of activities regarding the pension system

Second, from the market viewpoint: External instead of internal benchmark; Passive secondary acquisition; Investment limits; Precausionary regulations.

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Spcoal goals and financial markets

The new pension system aims at synergy of financial markets and social policy.

Public discussion is led as if the two were „distant planets”.

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Pension expenditure in terms of GDP (%)