Poles’ Pension Money Starts to Play the Market

Teresa Mierzejewska, a Warsaw city employee nearing middle age, is thinking hard these days about stocks, bonds and what they mean for her retirement pension.

She has to worry about these issues because Poland is shifting away from a U.S.-style social security system run entirely by the government and toward an arrangement where all workers depend on privately managed investment funds for more than a third of their retirement benefits.

Those under 30 years old as of Jan. 1 are required to join the new system, while those 50 or older are not eligible. People in the 30-to-49 age bracket--such as the 40-year-old Mierzejewska--must choose later this year whether to remain entirely in the state-run system or shift part of their contributions to a private fund.

The unfolding reform--which echoes but is less radical than the pension privatization instituted by Chile nearly two decades ago--is likely to be watched with great interest in the United States and other rich democracies wrestling with whether to at least partially privatize their government-run old-age pension systems, many here believe.

“It’s quite good to treat our Polish case as a case study,” said Marek Jandzinski, president of DOM Inc., a new pension-management company set up as a joint venture between Citibank (Poland) and the Polish insurance firm Warta Inc. Jandzinski’s firm is one of more than a dozen that will compete for clients in the new system.

Mierzejewska, for one, believes that the changes are good.

“In the new system, they can invest the money and have profits, and depending on the profits, I can probably get a higher pension,” she said. “I think that since the Polish economy is growing, the stock market should also grow. So I think I’ll bet on the new system.”

Necessity drove the reform: Without doing something to change the current formula, Poland’s social security system would collapse.

The dilemma is the same as that faced by many countries, with the proportion of elderly--relative to working-age people--expected to rise rapidly in the early years of the next century. If nothing is changed, payments to pensioners will soar far beyond the system’s revenue.

The privatization program--which shifts 37.5% of workers’ and employers’ contributions to privately managed pension funds that will invest in stocks and bonds--also aims to strengthen economic growth by boosting rates of saving and investment. Plans call for gradually increasing the proportion of contributions invested privately to 50%.

“This reform will contribute to long-run growth prospects of the economy,” said Marek Gora, executive director of the Social Security Reform office and a key author of the program. “Stock exchange capitalization will grow. People will learn how to behave in financial markets.”

Those joining the new system will need to choose among competing pension management companies--most of them Polish-foreign joint ventures. By law, no more than 40% of the funds invested by the firms can go into stocks, and no more than 5% can go into foreign investments.

Experts predict that firms will act cautiously in the first years of reform, sticking largely to bonds and bank deposits to ensure that capital is not lost. But over time, investments in riskier but potentially higher-yielding stocks are expected to increase.

Gora predicted that within a few years, 20% to 30% of the money in the privately managed pension funds will be invested in stocks and that the 40% legal cap will eventually be raised.

The government hopes the system will teach people about stocks and encourage more investment, Gora added. That would provide more capital for economic growth.

“An additional 1% of GDP growth might be expected within a few years because of this reform,” Gora said.

Krzysztof Lutostanski, president of PKO/Handlowy Pension Co., predicts that the reform will shift about $2 billion of pension contributions away from government coffers to private management this year, with that figure rising to about $3.5 billion next year.

“Every year we will change some consumption to saving and investment,” Lutostanski said. “This money could be used to invest in industry, transportation, agriculture, construction--any kind of activity. . . . The general direction of this influence will be positive.”

Ela Kasprzycka of The Times’ Warsaw Bureau contributed to this report.