“Projections for the future of Polish pensions are shocking and practically exclude dignified autumn years. The light at the end of the tunnel is provided by Employee Capital Plans, whose project contains a number of benefits and a few drawbacks,” writes Marcin Lipka, Conotoxia Senior Analyst.
In mid-February, the assumptions for the new retirement savings plan were presented. At first they may resemble the concept of the Open Pension Funds presented 20 years ago. In fact, the plan is definitely better from the point of view of both its direct beneficiaries and the economy as a whole.
Drama. Worse only in Mexico
There is nothing surprising about a statement that says retirement benefits for people starting their careers now will be dramatically low. This has been confirmed by OECD data on replacement rates, e.g. the ratio of retirement to our final salary. Poland is almost at the bottom.
The "Pensions at a Glance 2017" study published in December shows that the 20-year-olds of today can only receive 38.6% of their final net salary. This is the second worst result in the entire OECD. Only Mexico is worse, while the average value is 69.1%. Poland is divided by a great scale even to other countries from its region (Czech Republic, Baltic countries, Slovenia), where the result is close to 60%.
38.6% is a very optimistic version, so don’t get too used to it. Estimates are based on the assumption that we will be continuously employed from the age of 20 until reaching the statutory retirement age (in this period maternity leave counts, but studies don’t). Completing this condition in full is very difficult, which means that we will actually only receive about one-third of our last net salary.
You need to save
Poor future retirement benefits are directly related to demographic trends (low fertility, increasing life expectancy) and from the assumption of relatively early retirement. Since changing these key parameters is difficult, the only solution at this point is to propose a program that will "force" us to save money, while at the same time allowing us to actually use these resources in case of an emergency.
The Employee Capital Plan (PPK) program presented in mid-February by the Ministry of Finance responds to these needs in an optimal way. Through a series of incentives for saving money, it offers in the maximum variant (a contribution from an employee and their employer to 4% of their salary, starting at the beginning of their career) an increase in the replacement rate by as much as 45%.
PPK advantages
The main advantage of PPK is the combination of the strength of our savings, employer’s contributions and a subsidies from the state. The program is voluntary (as opposed to the OFE dues), but at the same time it’s attractive enough and is unprofitable to resign from, even for something like the loss of a budget bonus or the need to pay tax.
Collected funds will be freely available (this also distinguishes it from OFE) and will be inherited (an advantage compared to OFE). Another advantage of the PPK may be the competition from employers about the employee. Those enterprises that decide to finance the maximum due (4% of salary), may be perceived as caring for long-term cooperation with employees and for their condition once they have finished their careers.
In PPK, the funds accumulated by pensioners will finance the national economy, for example, through the capital market or the possibility of purchasing treasury bonds by the managing funds. This will reduce Poland's dependence on foreign funds and increase the annual household savings rate, which in recent years has been close to the 0% limit (according to OECD data).
Acceptable disadvantages
No program is flawless. This also applies to PPK. The basic downside is the fact that we have to finance the Plan ourselves, because 2 to 4% of our salary is transferred to the fund. It seems, however, that with the current economic situation and wage growth, this disadvantage is acceptable to most participants, especially since the assumptions clearly suggest freedom in the use of funds.
Another disadvantage is that our hypothetical replacement rate only grows for 10 years. Considering that the period of life after exceeding the retirement age for the 20-year-olds of today will exceed two decades, then it’s not a lot. On the other hand, this flaw may encourage longer professional activity, which will also increase the hypothetical replacement rate.
One may risk a statement that the PPK program assumptions presented by "MF" are optimal in terms of benefits and costs. One initiative will never be able to repair the entire system, but it is probably a good way to go, in order to build long-term savings for Poles and financial comfort in retirement.