EU Agreement With Poland Pension Rollback can prevent Hungary-Style Review

The European Union may be able to keep countries to follow the example of Hungary, which is holding a pension reform, to easily accept the rules of deficit countries to establish private retirement plans.

Poland and the European Commission agreed that the financial burden of changing some of the payments to private funds "taken into account" when the EU assesses its budget deficit and public debt, Deputy Finance Minister Ludwik Kotecki said on 10 December. While the agreement will not change the statistics of the EU, Poland may leave debt reduction report by national accounting rules, Jan Krzysztof Bielecki, an adviser to Prime Minister Donald Tusk, Rzeczpospolita newspaper wrote today in Warsaw.

Eastern EU members, including Poland pension contributions diverted from the pay as you leave the state of the system of private accounts to model the 27-nation bloc says it will be more sustainable. The review undermined their budgets funds to pay current retirees. Hungary moved to direct the funds to the state to meet the deficit targets of the EU imposed after the commission rejected a request to account for pension costs.

"Alarm Bell '

"The decision of Hungary was a serious alarm," said Marcin Mrowiec, economist at Bank Pekao in Warsaw, by telephone on 11 December. "The Commission probably realize that the current rules, which have been so disappointing for countries that reformed their pension systems are even more daunting for those who have not tried it yet."

Hungarian lawmakers are scheduled to vote today on rules to govern the private accounts to the state pension. This action is necessary to keep public debt to "bury" the country's economy, Prime Minister Viktor Orban said in a video posted on his Facebook page yesterday.

The new rules will apply during the excessive deficit procedure, sanctions for countries that breach the limit of budget deficit, the Finance Ministry said in a statement on its website yesterday.

Polish Economy Minister Waldemar Pawlak proposed suspending budget transfers to private pension funds to keep public debt of more than 55 percent of gross domestic product, which would lead to austerity measures. The government expects that the ratio increased to 53.2 percent this year, or 55.4 percent of the EU standards.

"Pretext"

The total value of pension contributions to private funds spent since 1999 accounts for 211 million zlotys (69.3 billion), or about a third of Poland's public debt. The country's debt would amount to 40 percent of GDP when stripped of the amount of debt held by pension funds, according to Finance Minister Jacek Rostowski

"This gives the government an excuse to redefine the public debt without nervousness of the markets," said Piotr Kalisz, chief economist at Citigroup Inc. 's unit Bank Handlowy SA in Warsaw. "Reduction of pension costs also make it easier to adopt the euro, though no one in Poland is thinking about that now."

Rostowski did not rule out the decision to exclude some costs of pensions for the definition of Poland's public debt while reducing the debt ceiling self-imposed, Rzeczpospolita reported. That would be "reasonable" to delay the decision until the Commission specifies the proposals, he said.

"An obvious and direct effect" of the decision of the Commission is to "eliminate the risk of breaching the 55 percent of the debt," Bielecki wrote in the newspaper.

'Profound changes'

Both Rostowski and Bielecki, said the most favorable treatment from the EU will not change Poland's current debt or borrowing needs, which means that the country has yet to consider modifying its pension system to find savings. The agreement does not imply any need to change the statistics or the law relating to statistical methodology in Polish law, the Ministry of Finance said in a statement.

Principles on how to "calculate and include these costs in the evaluation of EU countries' finances will be negotiated by a working group and written in the code of conduct for the Stability and Growth Pact, which sets out the fiscal rules for the trading bloc, Kotecki said. The mechanism will not change the official statistics compiled by Eurostat, said.

"If the compromise reached with the Commission relates only to the excessive deficit procedure, not a breakthrough," said Lukasz Tarnawa, chief economist at PKO BP in Warsaw.

The Commission in July urged EU members to increase the retirement age and pension systems review, the aging population will increase pension costs.

"Critical phase"

Brussels officials rejected a request in August for nine EU states, including Sweden, to account for the costs of new pension systems in the calculations of debt and deficits. Most countries face greater scrutiny of its budget deficit, the risk of a reduction in EU subsidies.

In most EU countries, pensions are paid by active workers. Demographic trends show that the ranks of retirees will swell and the number of taxpayers is set to decline. Fund-based systems reduce this burden through the investment of pension contributions now to fund employee pensions later.

"We are reaching a critical stage in the first cohort of baby boomers are approaching retirement and the European population of working age is set to start the reduction from 2012," the Commission said in a report on July 7 .