Friday, April 12, 2013

Moody's blues

The rating agency Moody's lead Polish analyst Jaime Reusche hit Polish markets with a doozy early Friday, telling Reuters news agency that if the Polish government nationalises any of the assets saved in the pension system's so-called second pillar managed by private pension funds, then Poland's credit rating could be cut. For those who don't know a credit rating from a cabbage patch, this is bad, real bad, bigos gone bad bad.

But, wait, Mr. Reusche seemingly had a sudden change of heart in the afternoon, when he told Poland's state news agency PAP that the Finance Ministry's proposals would be neutral for Poland's credit rating. Whew, what a relief. Things are okay then.

What is going on?

Recent weeks have seen Poland's business media frothing with claim, counterclaim, speculation, denigration and -- as this is Poland -- mad gesticulating about the retirement system, which wouldn't normally seem the fount for such passion. But the debate over the pension system has definitely left the confines of the economic policy wonk and stepped into the realm of symbolism.

Proponents see the privately managed part of the pension system as a symbol of reform itself and of the ascendancy of the free market. Any diminution of the role of the second pillar is a betrayal of belief in free markets. Nay, any reduction of the pillar's importance is heresy.

The government, however, says it must pay for this symbolism, and pay dearly. Poles' total pension contributions don't cover the amount that needs to be paid out as current pensions. So, for the chunk of pension contributions that go to these second pillar funds, the government must issue bonds. This of course increases public debt and has all sorts of negative effects.

The problem is that the privately managed pension funds have been investing a lot of money into government bonds themselves. This begs the question of why the government is issuing bonds that are then bought by the very pension funds for which they are being issued. Or, if the private pension funds are so great at managing assets, then shouldn't they be seeking yield elsewhere. This, at least, is the government's broad position and it thus wants to reduce the role of the second pillar.

Yet, the entire recent pension fund debate mostly avoids the real issue. The real reform in 1999 was not the creation of the privately managed pillar. Rather, it was moving from a defined benefit pension system to a defined contribution one. This is basically the difference between the government guaranteeing your retirement pension will be yay much no matter how much in contributions you put in and linking your pension precisely to how much you pay in.

This is a fundamental difference that doesn't really depend on whether some of the assets are privately managed or publicly managed. The individual accounts exist. You can argue that private is good no matter what or, alternately, that public is better. But no matter what side of the fence you fall on, your pension will be tied to how much you save. That, my friends, is the real message of Poland's pension reform.

As for Moody's Mr. Reusche, my humble advice -- not that it was solicited -- is that it would probably be best if all the rating agencies wait for the government's final pension reform proposals, which are expected in May or June.

In the meantime, here's me hoping Jaime enjoys a few cool ones after a rocky Polish media Friday and hoping you all welcome Poland X back after an extended sojourn.

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