Friday, June 28, 2013

Social security systems are dying

The Polish government's recently presented plans to "encourage" people to completely move away from the private pension funds (so called OFE) introduced in 1999, to the state social security system ZUS.

I would definitely agree, that OFE are not perfect retirement saving solution. They are too expensive (they take too high management fees) and they are seriously limited in ways they can invest their assets - mostly in government bonds. In connection with the government-sanctioned benchmarking system, they chase the same investment strategies, which is clearly visible in the very high correlation between the funds.

Nevertheless, their overall performance over the 14 years they have operated is not so bad. As for late June 2013, their average annualized return is around 9%.

What's more, they have clearly beaten the main Warsaw Stock Exchange index - WIG20:

Source: stooq

Yes, the private part of the Polish retirement system requires some changes. But the current government proposal is simply bad.

It was designed as a way to prevent budget from exploding due to the rapidly raising deficit. It most probably will give the Finance Minister some relief.

But it will not solve the problems in the slowly dying social security system.

Demographics, employment and migration trends will surely destroy the current system.

Poland is not the only country facing similar challenges. Take a look on Japan... 

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