Pensions and the great unknown


Probably better late than never but both Polish Presidential candidates have addressed the issue of pensions and the retirement age. The PiS candidate has of course gone down the populist route of stating that people will have to work till they die. Which completely misses the point that people are living longer with the Polish male now having a life expectancy almost a decade longer than when the Berlin Wall fell.

The incumbent President announced yesterday that he will present a parliamentary bill allowing workers to retire after “clocking up” 40 years “in harness”. What was not mentioned is the fact that there would not be an entitlement to a full pension for people who retire early and this will only accrue fully to those who work until the statutory retirement age. Now there is a difference between allowing people to retire early and bringing down the statutory retirement age. Just don’t expect the average journalist to understand this.

Which takes me back to the “debate” between the then Minister of Finance, the UK educated Jacek Rostowski and the architect of the transformation of the Polish economy Leszek Balcerowicz. Whilst I had a lot of time for Balcerowicz back then he does rather underline a different approach to economics than that espoused by John Maynard Keynes. JMK famously when asked a question as to why he had changed his mind replied “I don’t know about you but when I notice that the world has changed I change my view of it”. Unfortunately Mr Balcerowicz has not noticed that the whole economic paradign has shifted since he last held power and that red in claw capitalism does not provide all the answers.

However the main point is that the debate, which concerned taking back a chunk of pension funding into the State run ZUS from complacent fund managers, completely missed the point. Which is that there is very little difference between a state scheme based on current taxes paying for current penions, a state funded scheme (i.e. the state invests pension contributions to generate future cash flow) and a private investment fund based pension system. In every case pensions will ONLY be capable of payment if the economy in the future generates sufficient value added to support non working pensioners. In the case of an unfunded state scheme by way of taxes extracted from the productive and in the case of funded schemes only if the investments generate income.

In the case of funded schemes investment can be made within the given economy and hence that economy has to perform in the future. Of course some of the economy specific risk can be spread by investing in other economies. Except that what is a constant is that under performing economies sooner or later face devaluation of their currency (unless shielded by the Euro and assuming this strange currency is still with us in the future) and certainly by a higher cost of government borrowing.

So the real debate is actually how to ensure long term economic wealth and not how pensions are funded. And therefore the choise on Sunday is quite clear. Who is the safer pair of hands? The UK electorate has already decided. The Polish electorate has “two stabs at the cherry”, this coming Sunday in the Presidential elections and in the autumnal parliamentary elections.

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