Friday, 12 March 2010

No time to crack open the bottle of champagne yet!

In 2009, Poland, alone of all the EU and most of the industrialised world, managed to register an increase in GDP of 1.7 %. In addition, it is projecting further economic growth this year of 2 % or more. Furthermore at a time when many countries, in particular, Greece, have come under scrutiny for their level of indebtedness, Poland looks on the face of it to be safe - the "P" in the grouping of "PIGS" - those falling under chilly gaze of speculators, hedge funds and "Gnomes of Zurich" (relocating from London to enjoy a more favourable tax regime), is filled by Portugal not Poland - the others being Ireland, Greece and Spain. Poland`s current debt as a share of GDP is just 50.5 %. That is comfortably midrange - Spain is a little lower at 49.7% but that country has a raft of problems such as 19 % unemployment and other sundry problems, while Greece`s is 113.2 %. Just to round off the comparisons - the average of the EU 25 is 72.3% while the UK`s is 63.4%.

So far, so good and I think it would be churlish to deny the government a little pat on the back for not allowing the economy to "boom and bust" as others have. Poland`s Minister of Finance was in fine fettle earlier this week, as demonstrated by his interview for the "FT". He couldn`t, of course, pass up the opportunity of reminding others in the EU "to get their finances in order" and "buck up and cut out the fiscal stimuli and other "voodoo economics". But, as so often seen in life, such hubris can be followed by nemesis, although whether this a quick one-step or a more prolonged drawn out affair, only time will tell. For one statistic not so well known may give all of us some pause for thought.

According to data prepared by Jagadeesh Gokhale of the Cato Institute, the current and future pension obligations of Poland amount to an eyewatering 1,550.4% of GDP! Greece`s own figure is 875.2 % and the EU 25 average is 434.2%. The UK`s is 442.1%. Poland`s nearest rival is Slovakia with 1,149.1%. In other words, Poland is in a class of its own but not one many other countries would wish to imitate. On another level, it also suggests that looking alone at government debt, everyone may be missing the real threat to our future, and to our children and grandchildren`s standard of living - the cost to support us as we all retire.
Poland`s problem has been exacerbated by the relaxed treatment provided to people in the 1980s and 1990s in terms of taking early retirement and a full pension - a disguised form of unemployment not reflected in the then already reasonably high figures. Starting in January of this year, the Government started to reduce the pensions of tens of thousands of functionaries of the former regime by around a half. It has been reported that some were receiving pensions of around EUR 2,000 per month. One might say in passing that the government presented this as a delayed form of justice for those who were part of an illegal regime who declared martial law and cracked down on Solidarity etc etc although one suspects that economic motives were more than likely prominent in the decision.
Poland may yet still need to consider other drastic courses of action - a further increase in the pensionable age, reduced benefits etc if Poland is to escape the fate of "Greece on the Baltic"...


  1. Welcome to the blogosphere!

    Poland's pension obligations are the country's skeleton in the cupboard - and politicians are too weak to grasp the nettle. Issues such as farmers' KRUS payments (why should a wealthy farmer pay far less into the state pension system than a barber or florist?) and early retirement (why should a policeman be able to retire at 35 and carry on working for the next 30 years not paying any more into the system?) need to be tackled immediately.

    There are some bright spots - the number of malingerers poncing off long-term disability benefits has fallen drastically. Today, some 1.2 million people live off disability benefits - down from 2.7 million in 1998! A saving of 6 billion zlotys. If the state can bite the bullet on that one, why not KRUS and early pensions?


  2. New English-language blog on Polish economy - I'll be following!

    The actual problem is that Polish politicians are too timid to admit the state is not capable of providing pension bebefits to its people. Just look at the pension system reform: the government's obligations account for (12,22/19,52+0,6*7,3/19,52)=0,8504=85,04% of the current contribution. The goal of the roform was to take away that burden from the state. Meanwhile nothing has changed, ZUS is a black hole, pension funds are private-run companies that got the consest from the government to fleece people. OFE do not compete with one another, their fees are exorbitant and returns flimsy. Irrespectively of the profits they made or didn't make for future pensioners they raked in over 120 billion PLN in commissions and fees. I don't blame OFEs, which are the biggest beneficiaries of the reform, architects of the reform who created regulatory framework for those institutions are guilty.

    There are a few solutions to turn the pension system around.
    - higher retirement age,
    - scrapping various groups of their privileges, including farmers and miners, etc. Policemen are a different story. Those who are in service deserve something more for being in service 24 hours a day (let's look at example or Mr Struj who was killed in Warsaw a month ago by hools) - they should get higher pays for protecting law and order and be moved into other positions after 15 years of service, where they'd make use of their experience, early pension is not a solution.

    When it comes to public system I put forward the following:
    - the obligatory contributions to pension funds should be lifted,
    - investments in government bonds should be forbidden for deregulated OFEs (this would be actually the only regulation),
    - the state should run a lean system of providing subsistence pension benefits - contributions should be flat and slashed to around 100 PLN / month for everyone and everyone would get a benefit of no more than today's 1000 PLN when they retire (at least in the age of 65),
    - citizens should fend for the rest of their pensions on their own, or not save at all and fall back on their children.

    Slashing the contributions would result in even bigger shortfall of money in the current pension system, but if people pay less, than they have higher disposable income, so their consumption would have to taxed higher. That would encourage them to save and generate VAT revenues to finance the shift to a new pension system in teh shape I had outlined.

  3. Welcome, new blogger. Enjoyed the post but may I be allowed to throw a few spanners?

    1/ Might just be me and might be you just haven't had time yet but I don't like blogs where I can't establish who the author is. This 'about me' section is important, to me at least. Of course, if you're intending to slander the president or whatever then I'd understand........actually, I'm not sure I would even then.

    2/ Like I said, I did get something from the post but would have got more if there had been some sort of conclusion of the plot line. Okay, so Poland has a big pensions issue, I've read the Gala articles about cropping Jaruzelski's pension payments....and......what happens next? I'm missing the what happens next part and some analysis of what could be done and of course the speculation about how it will come to pass that this turns out to be another storm in a teacup.

    I don't normally do this, you know. Not intending to be anything other than helpful.


  4. I agree with what Scatts said. We don't insist you disclose your real name and surname, but you should have introduced yourself. I realise the importance of protecting privacy, but know absolutely nothing about you, we don't know on whose blog we comment.

    The last sentence looks like a summary, but the link between it and the rest of the post is kind of vague...