Poland fact of the day

When it comes to contingent government pension liabilities as a percentage of gdp, Poland appears to be above 350%.

France, Denmark, and Germany are next in line, with figures well over 300%.  For purposes of comparison, the United States is considered to have a serious pension problem but the corresponding number is only slightly above 100%.

Here is the John Authers and Robin Wiggelsworth FT story.  Australia seems to be doing best.

One reason for this high Polish sum is that the Polish government has semi-nationalized a lot of the private sector pension liabilities.  In 2014, this procedure (FT) did not receive much discussion:

As part of an overhaul of the country’s pension system, Warsaw will next week transfer from privately-managed funds to the state 150bn zlotys (€36bn) of Polish government bonds and government-backed securities, which will then be cancelled.

I believe this idea will reenter the broader policy debate sooner or later.

Comments

I have a small problem with the underlying maths. The expected expenditure (the pension liabilities) are over a number of years, why do the figure get divided by the GDP of a single year rather than of the same number of years?

Because it makes things look ever so much more scarier.

Most debts are paid over multiple years.
In business, we tend to express debt in proportion to profits (or EBITDA). It allows to say company X 's debt would take 5 years of profit to reimburse.
But most governments are bogged in chronic and massive deficit, so people fall back on expressing debt as a % of GDP. Actually, it would be more accurate to express goverment debt in proportion to government revenue, but it would be even scarier. In France the government's budget is roughly 20% of GDP, so our pension debt represents 15 times the government's yearly budget.

'so our pension debt represents 15 times the government’s yearly budget'

Which is comparing walnuts to airplanes, actually. The pension payments are spread out over decades, and are not a lump sum. Of course, if one wishes to be more than slightly dishonest in such policy debates, one can sum up decades worth of pension obligations into a lump sum. A meaningless figure, but one that supports certain policy directions. Such as what has happened to the American postal service, as noted here - 'That year, the Congress passed the Postal Accountability and Enhancement Act of 2006 (PAEA). Under the terms of PAEA, the USPS was forced to “prefund its future health care benefit payments to retirees for the next 75 years in an astonishing ten-year time span” – meaning that it had to put aside billions of dollars to pay for the health benefits of employees it hasn’t even hired yet, something that “no other government or private corporation is required to do.”The problem with the Post‘s argument starts in its thesis: that the post office is in some sort of deep fiscal hole of its own making – a result of being left behind in the Internet Age and a shrinking consumer base. The truth is that almost all of the postal service’s losses can be traced back to a single change in the law made by the Republican Congress in 2006.' http://www.nakedcapitalism.com/2015/10/the-right-wings-assault-on-the-post-office-smashing-the-myth-that-its-in-financial-trouble.html

A debt is a debt, whether it's repaid in 2 months or 50 years.

A basic accounting principle requires to attach related costs and revenues to the same year. Private companies have to account reserves for the future pension rights acquired as of today by their employees. If their directors fail to do it, they go to jail.

Public accounting ignores this principle and public pension debts are totally absent from national accounts. Basically, everyone is complied by law to pay a significant part of her paycheck to the public pension system every month. People believe that in return they have a pension right, an asset. But not a single public entity accounts for any debt corresponding to that asset. This whole "contingent government pension liabilities" thing is an attempt to estimate that burden.

I know nothing of the specifics of USPS. But nobody should have to provision for costs related to employees not even hired. The correct accounting procedure is to provision at a given date for the cumulated rights accrued by past and present employees (or citizens) as of today.

I agree with you almost entirely. There's nothing inherently wrong though with accounting for contingent liabilities based on expected family/employee/population growth. Indeed, for some purposes it is essential.

You have no idea what you're talking about. The funded status of a pension fund is not a political construction. It's a summary statistic depicting whether plan assets can cover projected benefit obligations. The timing of such cash flows are an added concern.

The 2006 law did not create a problem, it revealed one. FASB has been moving in this direction, and GASB is way behind the curve.

+1.

'The funded status of a pension fund is not a political construction.'

Of course it is. Let us take Poland as an example - somebody who started to work in 1955 was a citizen of the Polish People's Republic, and if they retired in 2010, they did so as a citizen of the Third Polish Republic. Tell me, how was the funding status of the Third Polish Republic in 1990 compared to all of the obligations incurred under the Polish People's Republic? Much the same thing can be said about East Germany, where all of the DDR's pension obligations were assumed by the BRD, though without any contribution on the part of the DDR.

'It’s a summary statistic depicting whether plan assets can cover projected benefit obligations.'

The U.S. can cover any amount of dollar debt it desires, just as the Polish government can with zlotys. One can argue about the value of the dollars or zlotys, of course.

'The 2006 law did not create a problem, it revealed one.'

That being that the Post Office was not currently funding any obligations for exmployees that not only had yet to be hired, but also still needed to be born.

I think what you are saying, then, is that Governor Jerry Brown has not actually put California in surplus, its just a pile of foolishness peddled by apologists?

If the post office still exists 75 years from now, we have done something terribly wrong.

Considering that the Post Office is a constitutionally named feature of the American government, I guess it depends on one's definition of terribly wrong.

Article I of the constitution says "The Congress shall have Power ... To establish Post Offices and post Roads." It doesn't say it *must* do so. A lot can happen in 75 years.

Your characterization is incorrect. PAEA basically subjected the postal service to a funding and accounting regime similar to what a private employer like FedEx would face.

If anything, the whole thing underscores the fantasy accounting and financial illiteracy associated with deferred promises like pensions and retiree health care provided by government. These costs are absolutely a part of an employee's compensation and should be recognized as such at the time services are performed. The lack of transparency around these arrangements make them an ideal area for public choice economics to run amok as it has.

As the post suggests, the US system is in much better shape than most European countries. This is mostly because a much larger share of the burden here is being met by the private sector, who are held to much higher standards in terms of transparency, rigor, etc.

As Tyler wryly notes: "I believe this idea will reenter the broader policy debate sooner or later." She's a coming. That's a demographic fact.

'This is mostly because a much larger share of the burden here is being met by the private sector'

American Airlines begs to differ with that, with their attempt to use bankruptcy to escape their pension obligations -
http://www.pbgc.gov/wr/other/pg/american-airlines-amr-pensions.html

And to see just how well the American private sector does, this link isn't bad - http://www.pionline.com/article/20150420/PRINT/304209987

"Your characterization is incorrect. "

That's generally the way to bet on anything prior_approval says. He doesn't discuss facts. He attempts to force facts to fit into his world view. And any time there's a conflict, it's the facts that change.

Or like the post just above yours, to refute Brian's note that the US pension system is in much better shape thanks to a greater private burden, he cherry picks one random company as if that defeats Brian's point.

He's a pretty high-functioning troll.

There is this simple mathematical technique called discounted cash flow analysis. You should research it.

Check + +

The problem is what impact massive public pension obligations will have on economies of nations.

The accounting problem is about measurement and disclosure: both of the derived amount and the methods, estimates, forecasts, discount rates, etc. used in the calculations. It's easy to monkey with the inputs.

I think the private pensions all over the world would love it if they didn't have to account for what they owe in the future. The companies that are responsible for the pensions would love to have access to that pot of cash for other uses.

This was a long hard fight for workers and unions to have their pensions guaranteed not based on future cash flow but on accumulated contributions.

When someone retires their expected pension costs are a debt. Anyone who structures it differently has no intention of paying.

One can argue about the levels of benefits, early retirement, etc. It is those things that are likely going to break the system. But the basic idea that when someone retires and no longer can contribute the future benefits are accounted as debt is a protection.

Yeah, too many stories over the years of some huge company going into bankruptcy and the workers finding out that their pensions had all been spent.

Good point. If my 30 year mortgage is 300% of my Annual Revenue , it is not necessarily true that I have a serious problem.

Absolute values don't matter. This metric is used for comparisons. If your neighbor has a 30 year mortgage representing 250% of annual revenue, he represents less risk even if 250% is still "dramatic".

GDP isn't revenue.

Neither is it representative of obligations that stretch out over decades.

Ones, at least in the case of Social Security, that are explicitly funded based on future earnings, and not in comparison to whatever arbitrary figure one wishes to use today..

prior_test2, give it up, man. You don't even know enough to know that you're embarrassing yourself.

Yawn. What debate? If a country nationalizes a private pension, it means it can do whatever it wants, including cutting the pension, and/or making it means-based. In Greece, the pensions were cut back in response to deteriorating fiscal conditions. People complained, but life moves on. Same will happen in the USA: Social Security is bust and will be cut back and/or made means-based.

You are correct in your assessment, but that assessment should inform current policy. It doesn't.

Same will happen in the USA: Social Security is bust and will be cut back and/or made means-based

Nope. Any President/Congress that passes such measures will be summarily removed in the subsequent election and replaced by a regime that will pay up. Entitlement cuts don't sell to the masses and, short of suspending universal suffrage (which would provoke a violent revolution), the U.S. government has no means to compel them on the matter.

With an intensive and very clever propaganda campaign, you may be able to push through a raise in the retirement age. That's about it.

Besides, Social Security's problems are minor. Medicare is the financial nuke waiting to go off.

Social Security’s problems are minor. Medicare is the financial nuke waiting to go off.

Yep. Social Security's problems are overblown by people who would prefer for ideological reasons that it not exist. Medicare, on the other hand, has very real short-to-medium term problems that need to be acknowledged by people across the political spectrum sooner rather than later, but probably won't be until the system is in crisis.

That increase in the retirement age will only impact people who are currently too young to vote (or too young to vote at a high enough rate to worry congressmen).

The reforms of the early 1980s only impacted people who had been born after the mid 1950s, thus excluding the overwhelming majority of voters at the time.

Correct. The ACA operates on the same basic principle.

Which is why we should make changes now, like the 1977/1983 reforms, contra Paul Krugman and others. The fix for Social Security is not hard: do it.

The fix for Medicare is higher taxes. Oh well.

It's ok. I'm sure the Poles can just live off their British pensions.

An entire political party continues to use cave man accounting (cash basis) for government pension liabilities. Of course when it comes to private pensions, they insist on accrual based accounting of pension liabilities. Nothing hypocritical there.

More significantly, this should be Germany fact of the day or EU fact of the day. The many people in the EU that say that Germany needs to start running a big budget deficit should explain why implied pension liabilities are not an issue.

Chile might be next in nationalizing its pension system. I think the political half-life of private pension systems is shorter than the actuarial half-life of public ones.

No, it will enter the public policy debate later, when the crash is imminent.

If, Mr Cowen, you were to report to us the FT's headline, we could all read the story free.

Pensions: Low yield, High Stress

Ta. I suppose Cowen doesn't do it because he hopes for paid work from the FT. Understandable.

Pah! That was an entirely familiar trot around the block, useful for only one point:

“For a given retirement income, ... when the market doesn’t do the work for you, you’ve got to do the saving. It hasn’t been much discussed in the context of macro stimulus, but it’s a reason why it’s been hard for low yields to stimulate spending.”

Keep in mind that pension liabilities have extreme duration. In some cases you need to discount a cash flow that occurs 70 years in the future. As rates have fallen since 2007, the value of pension liabilities has skyrocketed. If rates ever go up, many of these ratios will improve.

Please note the bond seizures were carried out in 2014 by the Civic Platform Party under then-Prime Minister of Poland, now current EU President Donald Tusk. The much-criticized Law and Justice Party did not not win election until 2015. Maybe a little context for everyone jumping on the bandwagon to castigate the current Polish government.

Not that it was a bad idea. The Clinton Administration should do something similar with the $200 billion or so in the federal employees Thrift Savings Plan "G fund" which would not have much of an effect on the US debt but would go far in reducing income inequality in the US. More broadly the variable benefit amounts federal pension programs pay out should be standardized to a single amount, say $1,300 per month for social security, federal and military retirement, etc with a total cap on the amount any individual can receive in federal pensions of say about $2000 per month. Since the federal aristocracy are disproportionately represented in the high end of the income and wealth distributions this would ameliorate the US's income inequality crisis.

Germany should invade again.

Just give it a little time.

First Poland should ally with Germany and Hungary to dismember a peaceful neighbor and then pretend chickens don't come home to roost.

You could designate x% of Government tax income to pensions and divide the take by the number of retirees. Problems solved but the likes of AARP will vote you out of office for that.

I don't know anything about Poland but Germany and others in Europe have a 3 pillar pension system. If I understand well, the 1st pillar (public "pay as you go" system) is under pressure but 2nd and 3rd pillars (employer & private savings) are fine. I can't find better data (http://www.tandfonline.com/doi/full/10.1080/17487870.2015.1041525) but it looks there are great differences among countries in Europe.

If you can't access the article, from figure 1.....retirement income coming from 1st pillar: Netherlands 48%, Germany 85%, France 79%, Switzerland 42%, UK 65%, US 45%. First impression is that there's correlation between importance of 1st pillar and pensions trouble. The US has a lower 1st pillar/GDP ratio because it's only half the source of retirement income. Germany's position is ugly, 85% of retirement income comes from pay as you go system. Both systems have strength and weakness. The US is healthy from the economical perspective but not so intelligent people may have trouble for not saving enough, so problems for individuals. Germany's system is more "fair", old people is not in trouble for not saving enough but the results is everyone (even young workers) are in trouble. There should be a middle ground ideal solution but I'm far from being an expert on this topic.

In any case, what happened in Poland (nationalizing 2nd pillar) looks risky. If risk was diversified, why put all the eggs in the same basket?

I think we can explain the origins of Prior. He was the mail carrier who delivered to GMU's economics department. Probably Alex made a joke one day about mail carriers being psychopaths, and Prior lost it, killed some co-workers and escaped to Germany.

Another reason for this is that Poland's most productive citizens are not working in Poland.

It is not true that Poland’s most productive citizens are not working in Poland. The people who have emigrated from Poland for work, are mostly representatives of one particular social group. I don't want to offend anyone, but it is something the statistics doesn't show. The emigrants are those who were not very successful in their country, regardless of their education. Almost every Polish has a Master degree, the level of education is high there and it is true to say that many Polish plumbers in the UK are Masters, so it’s not that those who have left Poland were the uneducated ones. It will be quite accurate to say that most of them come from smaller cities, villages or from the countryside, where there are fewer employment opportunities. It’s not that every Polish has at least one family member or a friend who lives in the UK. Anyway, I just wanted to say that 98% of Poles do not identify with the Polish emigrants, just keep it in mind. The ones who stayed in Poland were the ones who managed to get by against the odds, so maybe there are the ones who are more productive, efficient, successflul, determined etc...

I thought they mostly left for labouring and trades jobs in wealthier countries. It's not obvious whether this means more talented ones will stay because they're already doing well or leave because they can make more money elsewhere.

I think it would be more accurate to say that much of the lower class and some of the most talented have left - i.e. if you're earning minimum wage, it makes more sense to earn UK minimal wage rather than Polish minimal wage. At the same time, if you're an extraordinary talented banker, artist, medical researcher, it makes more sense to be in London/Oxford than Warsaw/Cracow. Plus there are a lot of middling Polish people in the UK as well.

But the statement that 98% of Poles don't identify with Polish emigrants is patently false - 1 million Poles are in the UK, so add their immediate family members, its safe to say that 4 million Poles identify with them - that's more than 10% of the population (Poland's population is 38 million).

But I see what you're trying to say - the median Polish immigrant in the UK is not representative of the median Pole. True that.

"Thank you, Poland, for lending us your young — a migration that really works"

http://www.thetimes.co.uk/article/thank-you-poland-for-lending-us-your-young-a-migration-that-really-works-pdlchvnpt

"For purposes of comparison, the United States is considered to have a serious pension problem but the corresponding number is only slightly above 100%."

The only logical thing to do is for the government to confiscate all of the 401K money and illicitly gained CEO money and redistribute that money to Social Security. That would make the system solvent over night. Of course, the right wing nuts will block any attempt at a logical governmental response.

The Polish national symbol is a steamroller driving over a large, Poland-shaped latke.

This is hardly the first time that outsiders have complained about Poland's pension system. Maybe it is unsustainable, but such a forecast was made by Jeffrey Sachs back in 1994 when the original post-communist government was voted out of power partly on the basis of their proposing to reduce Polish pensions. Sachs was quite worked up in a major speech at the AEA meetings over how "spoiled" those Polish voters were, how awful and unrealistic they were.

Maybe, but Poland is the only European nation that did not go into recession during 2009. They have not exactly done all that badly, even if they still have a lower per capita income than western European nations so that they have people moving west to work as plumbers in UK or wherever. What is weird and disturbing is that even though they have been one of the best economic performers in Europe they have elected a populist government that seems to be rolling back various political and civil liberties. This strikes me as more dangerous than some down the road possible crisis over overblown pensions.

How do you know that "Warsaw will next week transfer from privately-managed funds to the state 150bn zlotys..."? Seriously, where does this information come from? There are some traits here or there but nothing is confirmed, especially not the information that it will happen next week. Professor Cowed, can you, please, share with us the source of your knowledge?

* Professor Cowen not Cowed, sorry for the misspelling.

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