Finance Minister Rostowski is in favor of a new calculation of public debt Courtesy of KPRM

The Polish government is spearheading an initiative to get the European Commission to review the way public debt is calculated. According to the nine member states who have appealed to the EC, their pension reform efforts should be taken into consideration when public debt is calculated.

The request was made via a letter addressed to the EU Commission and to EU President Herman van Rompuy, and along with Poland was signed by Bulgaria, the Czech Republic, Hungary, Latvia, Lithuania, Romania, Slovakia, Sweden.

“This letter draws attention to the reforms in pension programs in some member states and the way it is reflected in public statistics,” EC spokesperson Amadeu Altafaj commented in Brussels after the letter was delivered.

The EC has said it will review the matter, but has not given a timetable. Germany, meanwhile, has criticized the proposal, saying it would unnecessarily complicate debt figures.

Planning for the future

Poland’s 1999 pension reform made it possible for those born between 1949 and 1968 to put some of their pension contributions into private investment funds. Alternatively, they could choose to put all their contributions into the Social Insurance Fund (ZUS).

Those born after 1968, however, are legally required to put roughly a third of their pension contributions into a private investment fund. As a result, ZUS has fewer funds for the payment of current pensions and requires extra financing from the state.

The state thus has to issue bonds or take loans to bridge the pension-fund gap in ZUS. Although the reforms are healthy for state finances in the long term – in the future, a part of the pension payment burden will be borne by investment funds – they add to the budget deficit in the short-term.

Poland argues that because the EU’s statistical office does not take this into account, it casts Poland in a worse light than member states who haven’t enacted pension reforms.

“Maintaining the current approach to debt and deficit statistics would result in unequal treatment of member states and thus effectively punish reforming countries,” the nine countries said in the letter presented to the EC.

Debt burden

Poland is trying to keep its public debt from exceeding 55 percent of GDP, a level that would trigger constitutionally enshrined austerity measures. Meanwhile, in May the EC estimated that Poland’s public debt would rise to 59.3 percent of GDP in 2011, from 53.9 percent this year.

Finance Minister Jacek Rostowski estimates that public debt would fall to 35 percent of GDP by 2014 if debt attributable to the pension system were exempted.

“I understand and generally agree with Mr Rostowski’s argument, because other countries which haven’t implemented pension reform simply have hidden debt which is not reflected in statistics,” commented Jarosław Janecki, chief economist at Société Générale. “But at the end of the day, this is not the solution to our problem, which is that we have a growing trend in terms of public-debt ratio to GDP.”

“What we need are medium and long-term measures to reduce this debt, such as cuts in spending,” he said.