Polish OAPs face uncertain future

Later that week we learn that the government's first move to buck up the system is to double the annual contribution limit, from 1.5 times the average monthly salary to 3 times. Hmm, double the current average annual contribution and you don't even get the current statutory limit. It is not the wealthy that need to save extra nor is is the wealthy who are unaware that optional retirement savings are actually a must.

Poland, actually a pioneer in pension savings, ought to take two key steps with its pension rules to remain avant-garde. Firstly, it ought to restructure its mandatory private pension system to allow younger workers to hold riskier investment profiles and, presumably, earn more over a lifetime of work.

And Poland must allow for some PRE-TAX voluntary pension savings to kick start the habit of individuals saving for their own retirement from their own earnings. Surveys currently show that Poles don't think it will be necessary. Big mistake.

Poland made the switch from an old-fashioned pay-as-you-go social security system to a partially privatized system in 1999, forcing younger workers and allowing some middle-aged workers to put half of their social security premiums into privately managed pension funds. Despite some notable hiccups at start-up, the system has been a boon to the nation, kick-starting the capital market, generating a real capital base and channeling big money into the right elements of the economy the way only markets do.

But Poland took a one-size-fits-all approach that needs to be repealed. The investment profile of the regulated pension funds suffer a cap on equity allocation - the percentage o the total portfolio that can be in stocks - at 40%. The remainder, by and large, goes into Treasury bonds and fixed income. As an investment profile, that is moderate-risk and moderate growth at best. It's no way to get rich. And it is no way to approach investing if your investment horizon is 40 years. On the flip side, as the market declines in 2008 have already proven, the profile is too risky for those approaching retirement age.

Compare with the following example, namely me. The pension fund (IRA) which I opened in the US long ago has the following profile: 50% global growth funds and 50% emerging market opportunity funds. That's all stocks, and not of the most stable category. As a profile that is high-risk and high-growth. I had a fabulous, I mean fabulous, run with the bulls. In 2008, well who cares? I am 39 today (really), I have 26 years to retirement (Got help me) and I don't feel the need to check performance and consider re-aligning the investment until I hit 50 or so (although I do rebalance annually).

Sidebar note to the Polish media: Stop reporting during the market downturn how much money pension savers have "lost." Nobody lost any money, save for a miniscule fraction of individuals who chose the private pension system despite their already advanced age. What the rest of us got, please stress, is an excellent chance to buy low. Our social security premiums are going further and further each month. We buy low and there is time for market rallies before we all sell high.

Back on topic: Somebody must have known that the system was inadequate if anyone wants to retire rich. And they did two things, both of which have proven to be inadequate half-measures.

1) They created a framework for employer operated private pensions funds. Those have floundered. Created at a time when unemployment was high and having a job was benefit enough, employers wouldn't suffer the high costs. No spark has since come.

2) They created the IKE voluntary pension funds which grow in value free of dividend or capital gains taxes. Those too have floundered. Poland not only placed a cap on the total amount of money that can be invested into such a fund each year, a relatively small sum at that, but it also failed to allow savers to put in pre-tax money.

The mandatory pension funds should be diversified for savers of different ages, allowing for equity-heavy fast-growth funds for younger workers, balanced funds as one enters middle age and pure income funds as retirement day arrives.

And Poland should worry less about the annual contribution caps for voluntary pension savings in the IKE funds and allow for at least a tiny portion of that contribution, even several hundred PLN annually, to be made from pre-tax money. Poles are tax smart and IKE will be nearly universal within several years.

The best return I ever make on any money I ever invest is the roughly 25% I make on each and every single day that I invest money I can deduct from my taxable earnings (assuming I would otherwise have walked away with 20% less after taxes).