PPK? It's not a bad idea for savings but a poor one for a retirement
Thanks to the PPK, a wide stream of money from the state, employees and employers will flow to the financial market. However, will the Employee Capital Plans provide us with a decent retirement? When we look at the provisions of the law, we can see that it is a form of savings account rather than a retirement security.
On January 1, 2019, the Act on Employee Capital Plans entered into force, and from July 1, some employers - so far employing over 250 employees - had to start implementing them. A lot of myths have already arisen around this topic. However, I do not want to persuade anyone to join the PPK or declare that they do not intend to pay an additional premium, but only look at the issue more broadly and look at some loose information on this subject.
WHAT IS THE PROBLEM?
Anyone who follows the statistics can see that our pensions will decline in the future. This is because in 1999, when the pension reform came into force, the equation used to calculate the amount of the benefit was changed. There is no longer the so-called the base part, i.e. the social element, the contributory and non-contributory periods from selected years are not counted. The equation is very simple now: our pension is all the money we have paid into the pension system in our lives, divided by the so-called life expectancy at the time of retirement - equalized for gender and provided by the Central Statistical Office. This is called the so-called defined contribution (as opposed to the defined benefit system) and means that the more contributions we pay, the fewer breaks we have at work and the later we retire - the higher our benefit will be.
In such a system, it is worse than before 1999 for those who earn little, have breaks in their work for care, due to unemployment and other life situations. So most of us. And those (mainly women) who (or rather who) retire early. Being in retirement from the age of 60 means 120 months more in the denominator of our pension equation, and in addition, in the numerator we have less contributions. Even today, the average retirement pension of women is on average almost PLN 1,000 lower than that of men. Let us add that in 2019 the number of people with pensions lower than PLN 500 increased by 30% compared to 2018 (i.e. those who are not entitled to the minimum statutory old-age pension without appropriate seniority). It should be remembered that today still half of the retirees are people from the so-called of the old system, i.e. those for which the pension was calculated on the old, more favorable terms. In 2018, the average newly awarded old-age pension under the old rules was PLN 4,221.61, and for the new ones - PLN 2,116.86. However, retirees under the new rules still have a part of the old-age pension calculated from the so-called initial capital, ie a more advantageously calculated contribution from before 1999. Those who entered the labor market after January 1, 1999, will enjoy even lower benefits. Why am I writing this? To show that while in 1999 we saved a system that is likely to be solvent, we did not save future pensioners.
EMPLOYEE CAPITAL PLANS
There are many ideas for solving the problem of low pensions. Introducing a minimum guaranteed pension or even the so-called civic pension, introducing a hybrid model (partially defined contribution, partially defined benefit), increasing the retirement age, taxing the work of robots, taking advantage of higher work efficiency or the so-called risk diversification. The latter term simply means that our pension would be financed from several sources. This (though not entirely) is theoretically provided by the government by implementing Employee Capital Plans.
The idea is that employees and employees are encouraged to save money in their old age. If we pay a contribution of 2% of our salary, the employer will add 1.5%, and the state will also add a welcome payment (currently at the level of PLN 250) and annual subsidies (PLN 240). If we earn up to 1.2 minimum wage, our premium may be slightly lower. However, both the employee's and the employer's contribution may be increased, if the parties so wish, to the level of even 4%. This means that we save more, but also our salary decreases, and the employer has higher labor costs.
Of course, the system has advantages and disadvantages. The advantage is probably that our savings are increased by a supplement from the employer and the state. We can, of course, argue whether it is a good idea for billions of zlotys, also from the state, i.e. the Labor Fund, to flow to the capital market. However, we no longer have any influence on it, because the legislator wrote it just like that. I do not judge this solution from the point of view of the state's interest, but only from the point of view of the person who saves - for them it is simply extra money. The advantage of this system is also the fact that 25% of the amount set aside can be used at any time if we need this money due to a serious illness of our own or a family member - let's add: non-refundable and in full, i.e. not only from what we have paid ourselves, but also also from what the employer and the state. Unfortunately, only the husband / wife and children are members of the family, which excludes, for example, people living together in the household in informal relationships. There is also no help in the case of a parent who is seriously ill (which may turn out to be crucial in the future due to the aging of the population). You can also use an auto-loan, i.e. without tax and at 0%, borrow savings from the PPK to finance your own contribution for an apartment - although only up to the age of 45.
Another advantage of the system is that it is voluntary. If we don't want to, we just fill in the declaration and don't join. However, we must make this effort, which many people consider to be a problem and a trap - people will be included in the PPK because they will not even know that they have to do something about it. This is a probable scenario, especially since in June 2019, according to CBOS, only 42% of employees heard about this system. However, I do say that employees will get interested in it soon when they see that the salary is 2% lower. They will also pay a higher tax, because the employer's payment will be taxable income for the employee. I also assume that, however, employers - which is their statutory obligation - will inform about the employee system, and they will even have to consult details with their representation (e.g. with which institution to sign contracts for PPK management and management).
On the basis of the so-called auto-enrollment (automatic inclusion with the possibility of exit) company pension programs were also introduced, e.g. in Great Britain or New Zealand. So it is not a new or unusual solution. Something else is surprising. Well, we must renew our exit declaration every 4 years, so always until April 1, 2023, 2027, 2031, etc. In turn, people between 55 and 70 must declare if they want to be included in the system (they are not automatically turned on), and people over 70 years of age cannot join it at all. Also, not all of us will be included in the system right away. First, large companies, from 250 employees, from January 1, 2020 companies employing 50-249 people, from July 1, 2020 companies with 20 to 49 employees, and only from July 1, 2021 also small companies employing less than 20 people, and the entire public sector .
Interestingly, the most common accusation against the system, which is made both on the right and on the left (although in a completely different context), is that the PPK is actually the second OFE. And in fact, the fact that our money flows to the capital market (and not only ours, but also employers and the state) is problematic. Because should the money that is to guarantee our retirement be played on the stock exchange? Not to mention whether such a large stream of money from the Labor Fund should be directed towards financial institutions. This is doubtful, to say the least. Especially from the point of view of a person who distrusts the markets, choosing this form of security can be difficult. The more that there is really no guarantee of the payout. Because if we retire at the time of the stock market crash, it may turn out that our savings have significantly diminished. However, it should be stipulated that they are to be the so-called defined date funds, and therefore invested the safer, the closer we are to the retirement age.
In turn, liberal voices comparing PPK to OFE proclaim that "they will take this money from us in a moment". Of course, we are not able to fully predict this - if only because the less democracy and the rule of law, the less certainty of all forecasts - but according to the current legal situation, it is rather unfeasible. The main difference is that when open pension funds were introduced in 1999, part of our public contribution was directed to them. The contribution was 19.52%, of which 12.22% went to ZUS (and more precisely to the Social Insurance Fund), and 7.3% to the OFE. Thus, ZUS still had the same expenses, but by 1/3 lower revenues, hence the catastrophic situation and a deficit in the Social Insurance Fund, which in his famous book OFE: the catastrophe of pensions privatization in Poland was described by prof. Leokadia Oręziak. The abolition of the obligation of OFE and subsequent decisions concerning, inter alia, transferring 51.5% of the units of account held in each member's account to special sub-accounts of persons insured with the Social Insurance Institution (ZUS), were not "theft of private money". This is for several reasons.
First of all - this money is still assigned to a specific insured, and the indexation in ZUS is even more favorable than the results achieved by OFE. And secondly, the judgment of the Constitutional Tribunal (K1 / 14) of 2015 confirmed that the contributions transferred to OFE are public funds, only given to the funds for management. The payment of contributions is the responsibility of the insured, and they themselves constitute public funds to cover public liabilities of the state. So no one stole anything from anyone. And it is the public status of contributions that fundamentally differentiates OFE from the PPK, where it is additional, private money. Contributions to the PPK do not have any impact on the size of the deficit in the Social Insurance Fund.
IS IT EVEN A PENSION SYSTEM?
The key question, however, is: will the Employee Capital Plans provide us with a decent retirement? Even if we assume that our money will be well invested and that no economic crises will affect us? In my opinion, the answer to this question is no, because it is not a retirement pension. When we look at the provisions of the act, we can see that it is rather a form of a savings account. According to Art. 99 of the Act, at the age of 60, we can collect 25% of the amount at once, and collect the remaining 75% in 120 installments (you can increase the number of installments, but they will be lower then). What does that really mean? It's just that until the age of 70 we will still have something (or maybe) from this system (or we will have), but just when the needs in old age grow significantly (single household, medical costs), then the money ... ends. Moreover, these payments (as opposed to payments from ZUS) will not be indexed.
The threat may also be lurking from another side: someone who does not earn a minimum pension (in 2019 amounting to PLN 1100 gross), but has a sufficiently long contribution period (20 years woman and 25 years man), has the right to receive compensation from the state up to this amount. However, if the contribution from the PPK causes someone to exceed this amount - perhaps ZUS will not pay extra to the minimum pension. The question then arises: what after the age of 70, when there will be no money from the PPK? This issue is not yet settled.
WHO IS THIS SYSTEM FOR?
The financial market should of course be mentioned among the biggest beneficiaries of the system. It is financial institutions that manage the appropriate number of funds or sub-funds of a defined date and have experience in the management of open-ended investment funds, pension funds or open-ended pension funds that will manage the savings of PPK participants. It is to them that a vast stream of money from the state, employees and employers will flow. It is worth adding here, however, that the management fee is much lower than it was in the case of OFE - it is to amount to 0.5% of the fund's net asset value per annum. It is also possible to remuneration for the result of fund management, the so-called a success fee of 0.1%, but of course only if the fund returns a positive rate of return. On this occasion, it is of course necessary to mention the enormous role played by the Polish Development Fund in the PPK. He is responsible for the records, creates a special portal, but there is also the so-called designated financial institution. This means that it creates an Investment Fund Society (PFR TFI), which cannot refuse any employer to establish a PPK (others have such an option), and if the employer does not choose his TFI (although there is a fine for it), PFR will be the default society. Despite this, it does not seem that PFR TFI will dominate the market, but some fear that it may be used to finance, for example, "politically right" investments.
And will employees benefit? It is important that the word "pension" does not even appear in the name of the PPK. Again, this is simply an additional savings account that is funded by three parties, not just one person. So if someone wants to save (with a limited but not impossible withdrawal of capital earlier), this is an idea worth considering. But the PPK itself is not enough to support citizens in retirement. It does not guarantee the amount of payments or their valorization, does not provide the so-called annuities (i.e. lifetime payments) and may increase pension inequalities - those who can afford it will save, so additional money from the state will most likely flow back to the wealthier. Together with the PPK, we get a chance to save on fairly favorable terms, but the retirement catastrophe of the future has not yet been stopped.
