Changes in Open Pension Funds to help ordinary people
Boguslaw Kowalski
If we accept the proposals of Labour Minister Jolanta Fedak (the Polish Peasant Party) the deficit of the state budget can have ca. 22 billion zloty decrease per year, i.e. over four times more that the VAT increase proposed by the government. Additionally, this operation will not affect ordinary people and economy as a whole. Why does the government oppose this proposal so strongly?
What are the Open Pension Funds?
After the reform conducted in 1999 Poles have the possibility to work for their pensions using three paths, called pillars. The first two pillars result from the division of the contribution paid obligatorily by every current employee (deducted from his salary). 12.22 % of this contribution goes to the Social Insurance Institution, which is a state institution and which pays pensions to the retired. It will also do that in the future. It is the so-called pillar I.
The remaining contribution, in the amount of 7.3%, the Social Insurance Institution transfers to the Open Pension Funds (OFE). These are financial institutions founded and run by big banks, mainly international ones. They are to gather money deducted from salaries on individuals accounts of all those who pay the contribution. This money is to be invested safely in financial markets and increase the capital from which future pensions will be paid. Thanks to this solution everyone should know what happens with the money he earns. Those born after 31 December 1968 must select some Open Pension Fund, which they want to belong. It is the so-called pillar II.
There is another possibility, i.e. additional saving in the form of bank deposit, insurance deposit or investment fund. This form is not compulsory and if someone decides to use it he must invest extra money apart from the contribution deducted from his salary. But the person decides about all things himself. It is the so-called pillar III.
What happens with the money deposited in OFE?
At the end of July 2010 the Open Pension Funds had 201 billion zloty. This sum systematically increases because every month the Social Insurance Institution transfers the due fees. It July 2010 it was 2.9 billion zloty. There are also profits from investments. In Poland there are 14 Open Pension Funds. Four of them belong to the financial institutions, which are fully or partly in Polish hands. The remaining funds are big international corporations with such firms as ING, Generali, Aviva, Allianz, Nordea, Amplico, Axa and others.
After receiving the fees OFE deducts its commission to cover its costs. This commission is very high, about 10% of the transferred sum. Taking into account the average profit rate from safe financial investments one can assume that within the first two years our contributions work for the commissions of the Open Pension Funds. If the current assets are ca. 201 billion zloty, making a simplified calculation it means that within 10 years the managers of the Open Pension Funds have earned ca. 20 billion zloty, on average ca. 2 billion zloty a year, i.e. the costs of constructing ca. 80-100 km of motorway.
Let us look what the financial institutions ask us to pay so much for. Because the money gathered for future pensions must be maximally safe OFE must invest only up to 40% of the gathered means in the stock exchange, including not more than 5% in foreign stock exchanges. The remaining money is invested in safe state bonds. It means that fulfilling various liabilities the budget debts increase more and more. The state issues bonds, which the pension funds buy to a considerable extent.
Consequently, we have a specific chain of relations and transfers. A contribution is deducted from every employee’s salary by the state Social Insurance Institution. Then some part of this contribution is transferred to the Open pension Funds only so that OFE could buy state bonds and make their profits.
Within 10 years the Open Pension Funds increased the capital of future pensioners for ca. 22 billion zloty, mainly from the interests gained from state bonds covered by tax-payers. During that period the Open Pension Funds took commissions in the amount of ca. 20 billion zloty, which they mainly transferred abroad. Additionally, 5 % of this capital, i.e. ca. 10 billion zloty, was located abroad, thus financing foreign and not the Polish economy. This is the balance of the first decade of the functioning of the Open Pension Funds. One can see clearly who has made the biggest profit.
What does Minister Fedak propose?
For over two years Labour Minister Jolanta Fedak has proposed changes in pillar II. Namely, she wants to decrease the current means directed to the Open Pension Funds. Instead of 7.3% of our salaries she wants to have only 3%. The remaining 4.3% would be left in the Social Insurance Office. And recently, facing the increasingly bad situation of the state budget she proposes to stop the transfer of all fees to the Open Pension Funds for two years. She refers to the examples of the Baltic countries: Lithuania, Latvia and Estonia, which have introduced this solution in the financial crisis.
If the fees transferred to the Open Pension Funds were suspended the deficit of the state budget would have a ca. 22 billion decrease per year. And if only the amount of the tax allowance was decreased the budget would gain ca. 10 billion zloty per year. The reason for this situation is that every year the state pays extra several billions to the Social Insurance Institution to ensure its current payments. If more money from the contributions remains in the Social Insurance Institution its current deficit will decrease and the state budget will have to pay less extra money.
As we can see the proposals are to ensure a bigger effect than the 1% increase in VAT, which is to yield ca. 5 billion per year, proposed by the government. The increase in VAT means that the prices of fundamental products go up and this will burden ordinary Poles, especially pensioners whose standard of life will get worse.
The acceptance of the changes concerning the Open pension Funds would not affect economy and ordinary people. It would be the international corporations running the Open Pension Funds that will have losses since their commissions will be lower to a considerable extent or even they will have no profits for two years. And this explains the strong opposition against such changes being introduced. But the government should not have doubts whose interests they should care for.
"Niedziela" 35/2010