Poland Kicks Economic Own Goal by Backing Retirement-Age Cut

Updated on
  • President’s proposal sees women retiring at 60, men at 65
  • Move to strain budget and growth prospects, economist warns

Poland’s government backed plans to cut the retirement age to among the lowest levels in the European Union, opening the door for legislation that economists said will boost budget spending and hurt the country’s economic prospects.

Making good on an pledge that helped it win elections last year, the ruling Law & Justice party is seeking to roll back a 2012 increase in the retirement age to 67, from 65 for men and 60 for women. If enacted, the cut will cost the budget an additional 10 billion zloty ($2.5 billion) a year starting in 2018, according to Henryk Kowalczyk, minister without portfolio in the Prime Minister’s office.

“Poles are waiting for this reform and we will deliver on our pledges,” cabinet spokesman Rafal Bochenek told reporters in Warsaw. “We’re a responsible government and financing for this reform is guaranteed.”

While aging populations and longer lifespans have forced forced most EU countries to raise retirement ages despite public outcry, Polish President Andrzej Duda is pushing for the reductions. The government, which has already approved higher benefit spending, has delayed endorsing the plan over concern that it may be too costly and reduce the size of the workforce. It endorsed Duda’s draft without a request for changes sought by Finance Minister Pawel Szalamacha to link benefits to years worked.

“It seems clear that populist arguments are prevailing, even though the measure runs against the interest of the economy as well as of Poles,” Piotr Bielski, an economist at Bank Zachodni WBK in Warsaw, said by phone on Tuesday. “The labor market may become a bottleneck for Poland’s economic activity.”

Counter Trend

The cabinet wants to introduce the lower age in October of next year, Bochenek said. While the government has pledged to keep the 2016 budget shortfall under the European Union’s ceiling of 3 percent of gross domestic product, it’s set to rise from 2.6 percent last year.

“The government’s position on the Presidential draft allows for preparing the 2017 budget with a deficit below 3 percent of GDP,” Szalamacha said in an e-mailed statement after the cabinet meeting. In a separate communique, the government said that while it backed Duda’s plans without preconditions, it “requests that parliament consider” linking retirement benefits with continued employment.

The zloty currency traded little changed after the announcement, declining 0.2 percent on the day to 4.3801 per euro at 6:55 p.m. in Warsaw. It lost 2.8 percent this year, the worst showing among 12 currencies from emerging Europe after Turkey’s lira.

The International Monetary Fund sees the fiscal deficit rising to 3.1 percent next year if the government fulfills its election promises. Breaching the 3 percent ceiling may endanger billions of euros of development funds from the EU budget that the country of 38 million depends on to drive help growth and raise living standards.

Work, Death

Poland also has one of the EU’s lowest labor activity rates, with 56 percent of the working-age population either in jobs or looking for work, according to Central Statistical Office data for the first quarter of 2016.

A waiver passed by German Chancellor Angela Merkel’s coalition two years ago lets workers retire with full benefits at 63, or four years earlier than usual, if they’ve paid into the system for at least 45 years. The Polish Finance Ministry had sought earlier retirement after 35 or 40 years spent working, which would have halved the costs of the overhaul, according to Deputy Finance Minister Leszek Skiba.

Arguing that rules implemented by its political opponents force Poles to “work until death,” Law & Justice’s plans are set to make Polish women the EU’s youngest to gain pension benefits at 60, while men would be tied for second-youngest at 65, following their Slovak counterparts, according to the Finnish Centre for Pensions.