Poles don’t save enough

The net savings rate in Poland remains low compared to other countries of the European Union thus increasing the savings rate through the creation of pension funds becomes a necessity.

Savings accumulated by the population and the enterprises constitute the basic source of financing for the investments carried out in the economy. This is due to the elementary relations between the macroeconomic figures. If we look at the national income, the income of households or the income of companies from the perspective of how that income is allocated, there are always two possibilities: spending it or saving it.

It is worth noting that the very fact that the not spent income is enough to finance investments. There is no need to put the savings into the banking system or other financial institutions. They can be stored in cash, which is often the case if we take into account the relatively low percentage of inhabitants using banking services in Poland. Due to the fact that investments are financed from savings, many authors see these two concepts as synonymous.

Savings and the financing of investments

In the publications concerning national accounts, Statistics Poland (GUS) determines that savings are “the part of disposable income that is not spent on consumption”. It further states that “they are allocated for capital accumulation (creating and recreating assets, such as gross fixed capital formation, increase in tangible current assets and assets of exceptional value), capital transfers and/or debt reduction”.

In macroeconomic terms, the size of the domestic savings determines the country’s ability to finance domestic investments. In the event of insufficiently high domestic savings, it becomes necessary to utilize foreign savings, either in the form of direct foreign investments or in the form of debt securities.

GUS has recently published national accounts data concerning the rate of savings in the two so-called institutional sectors which are the most important in terms of the value of the annual savings accumulated. This involves the savings of the sector of non-financial enterprises and the household sector. Apart from private individuals, the latter sector also includes individual entrepreneurs and farmers.

The presented figures show a very close relationship between the savings rate and the gross capital formation rate (capital accumulation rate) and the gross fixed formation rate. In 2014, the value of the gross capital formation (capital accumulation rate) was higher than the value of domestic savings and required supplementation with foreign savings, while in 2015 and 2016, the savings rates slightly exceeded the gross capital formation rate (accumulation rate) and even the gross fixed capital formation rate.

In this regard, two worrying trends were observed in relation to Poland. On the one hand, the gross investment rate decreased from over 20 per cent of GDP in 2015 to 17.7 per cent in 2017; and on the other hand, the importance of the increase in inventories (tangible current assets) grew to as much as 2 per cent of GDP in 2017.

In order to meet the goals of the economic policy, and in particular to achieve an investment rate of at least 22 per cent of GDP in 2020, as set out in the Polish government’s Strategy for Responsible Development, decisive and comprehensive actions are required in three directions:

  • creating conditions for companies to increase their propensity to invest;
  • encouraging enterprises to limit the increase in inventories;
  • increasing the propensity to save in the population.

Low savings rate in Poland

Greater savings of a country’s population contribute to a greater ability to finance investments and to reduce the utilization of foreign savings. Meanwhile, the net savings rate of the Polish population remains low compared to other European Union member states. It is much lower than the average in the European Union, as well as in the countries of the region, e.g. in the Czech Republic or Hungary.

The OECD defines net household savings as the difference between disposable income and the consumption expenditures, adjusted for the change in net equity of households in pension funds. The applied approach uses national accounts data according to the SNA 2008 framework. The OECD emphasizes that household savings are the main domestic source of funds used for the financing of investment capital, and are important in supporting the country’s long-term economic development.

The low propensity of Polish households to save money is deeply rooted in the relatively low level of affluence of Polish society inherited after the period of the Polish People’s Republic. During the economic transformation, Poles have gained enormous opportunities with regard to purchasing consumer goods or improving their housing conditions. Polish citizens have pursued these opportunities with great intensity. After years of income stagnation and pauperization, the confrontation with the living standards in the old EU countries causes frustration and leads people to try to catch up and to bridge the wealth gap.

The increase in consumption is also driven by other factors influencing the reduction in savings. In this regard, it would be necessary to mention the current very low level of interest rates on bank deposits, the increasing income disparity in the society (and no one wants to appear poorer than their neighbors) and the easy availability of loans and credits on the highly competitive banking and non-banking market.

Poland’s central bank, NBP reported in its statistics that the PLN and foreign currency deposits of the Polish population accumulated over the years in the financial institutions amounted to PLN779.1bn. Meanwhile, the level of loans incurred by the population in the same institutions amounted to PLN704.7bn, which means a small surplus of deposits over loans. Of course, people who accumulate savings are not the same people as those who take out loans.

The presented data confirm the low propensity of Polish citizens to save money. In turn, the deposits of enterprises have remained at a level exceeding PLN200bn since mid-2014 and are constantly growing (amounting to PLN263.1bn at the end of June 2018). One cannot expect these funds to be used directly for investments, because after the financial crisis which broke out in 2008, both foreign and domestic corporations are subjected to a new paradigm of cash management, which forces them to hold cash as an element of independence from the banking system and as a way to build the company’s prestige in the eyes of competitors and other stakeholders.

Pension funds are needed

The OECD’s approach to household savings of the population places great emphasis on collecting household savings in retirement pension funds. After limiting the amount of funds collected in Open Pension Funds, the government started working on an act establishing the Employee Capital Plans (PPK). The Employee Capital Plans are supposed to contribute to increased long-term savings, and are supposed to be universal, albeit voluntary, and they are to be co-financed by the employers and in part by the state budget.

It seems that, despite the various reservations, the creation of the Employee Capital Plans was necessary, even in light of the objections and critical opinions. People are afraid that, after some time, the Employee Capital Plans could share the fate of the Open Pension Funds. The information campaign in the media pointed out that the savings rates have to be increased in order to avoid the threat of low future pension payments.

The need to increase the savings rate through the creation of pension funds is becoming more urgent not only due to the necessity of financing investments in the economy, but also in order to ensure an appropriate level of future pension payments for today’s workers. In its report “Pensions at a Glance 2017”, the OECD indicates that among the OECD member states the weighted average ratio of the value of private pension funds to GDP is 83 per cent, while the ratio of the value of public funds to GDP is 13.9 per cent. In Poland, these ratios reach 9.3 and 1.1 per cent, respectively.

The model used by the OECD for the simulation of pension systems shows that the insufficient size of pension funds is the main reason for the future low replacement rate (the retirement income expressed as a percentage of the pre-retirement salary) projected in Poland. At just over 30 per cent, that replacement rate will be the third lowest among OECD countries (after the United Kingdom and Mexico). The situation is the most favorable in the Netherlands, where the ratio of the value of private pension funds to GDP of over 180 per cent guarantees a replacement rate of almost one hundred per cent. This is due to the fact that contributions reaching almost 37 per cent of the remuneration are made to private pension funds (whereby the employee pays 16 per cent and the employer pays 20.9 per cent), as well as the fact that the retirement age is set at 71. According to OECD statistics, in Poland the two parties (the employee and the employer) are required to pay an equal contribution of 9.76 per cent of the remuneration to a public fund.

The establishment of pension funds under the Employee Capital Plans or other solutions is crucial both for the financing of investments and for obtaining higher replacement rates by the current employees paying contributions to the state-run Social Insurance Institution (ZUS).

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