Data on the so-called ‘hidden debt’ is not worth much

Apr 23, 2018 12:48 PM|Conotoxia.com

“276% GDP or just under 5 trillion PLN - this is how much is accounted for Poland's pension obligations towards its citizens. Although the value is shocking, it has practically no meaning. Additionally, it can be interpreted askew, because in Germany or the Netherlands analogical indicators are even higher,” writes Marcin Lipka, Conotoxia Senior Analyst.

Marcin Lipka, główny analityk Cinkciarz.pl

At the end of last week, the Polish Central Statistical Office published data, which have been speculated about for a long time. It has even been called ‘the hidden debt’. This relates to pension and disability obligations for current and future beneficiaries. At first glance, they might be alarming as the debt of the public finance sector is about 50% GDP and the pension system 276%. Is there anything to worry about?

Poland is worse than Switzerland, but better than Germany? Nonsense

In 2013, the European Parliament issued a regulation on national accounts. The purpose of one of its chapters was to organize statistics on pension systems in individual countries. Last week's CSO data is the result of the EU legislator’s activities.

The basic weakness of this publication, however, is the lack of usefulness. It estimates pension liabilities for people who have already received benefits and for those who have taken up employment and will receive pensions in the future. However, the data does not take revenues or expected contributions into account.

For Poland, all current and future pension system liabilities (discounted) have a value of 276% GDP. It is higher than, for example, for Switzerland (about 200% GDP), but lower than for Germany (291% GDP - 8.9 billion euros) and the Netherlands (over 350% GDP). Does this mean that the Polish national social security system is better than the one in Germany or the Netherlands? Unfortunately, we do not know this because only the costs of action are presented. There is no information about revenues or about hypothetical subsidies from the state budget.

Rock-bottom pensions despite enormous funding

The ZUS publication "Forecast of pension fund inflows and outlays until 2060" will offer much more information about the insurance system situation. First of all, it is worth paying attention to the serious deficit (the sum of pensions paid out is higher than the contributions paid into the system), resulting in the necessity of huge subsidies directly from the state budget.

In the basic variant presented by ZUS, including the most likely scenario of GDP and wages or unemployment and inflation growth, the discounted deficit remains in the range of 50-70 billion PLN annually until the end of the projection. The negative social security system balance increases the debt-to-GDP ratio by 70 percentage points, compared to the scenario of balanced inflows and outflows. These conditions will be even worse because the latest calculations do not include the last decrease in the age of retirement. In Germany, there are also subsidies to the social insurance system (about 70 billion euros in 2016 - according to Deutsche Rentenversicherung Bund data). However, in spite of these subsidies, Poland’s western neighbor is dealing with a surplus of the public finance sector. According to the latest International Monetary Fund estimates, each year will end with a positive balance in German finances in the next four years.

It should not be forgotten that (OECD estimates - Pensions at a Glance 2017) Poles who have currently started working will receive 38.6% of their last salary (women - 34.1%). In Germany, in turn, the pension relationship to the last net salary will exceed 50% for both sexes.

Keep working and save - there is no other way

From all the currently available data, it appears that Poles will have to work longer (regardless of the statutory retirement age) and save more for their autumn years (through a PPK or similar system). The necessity of these activities is not brought closer by the recent publication of the Polish Central Statistical Office, which even with international comparisons, may be misunderstood that the Polish pension system is more stable than its richer neighbors.

Apr 23, 2018 12:48 PM|Conotoxia.com

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