Poland's Piggish Pols--They're Not Alone

Poland has pulled a destructive stunt worthy of Argentina. It is seizing half of the Polish people's private retirement funds. All government bonds in these pension-plan portfolios are being forcibly transferred to the government. Since the bonds are no longer held by investors, the government is declaring that the national debt has been reduced by the face value of those securities. Neat trick, including the spin on this Soviet-style seizure: The government is calling the nationalization a "pension overhaul." The ghosts of Stalin and Lenin must be smiling.

Barack Obama must be wondering why he hadn't thought of something like this and may be tempted to try such a scheme here. It's so delicious to a socialist: Seize Treasury bonds and declare them null and void. Some Washington socialists, a.k.a. Democrats, have already made noises about getting their hands on a portion of the assets held by individuals in IRAs and 401(k)s. The Administration floated such an idea earlier this year, suggesting that the size of these retirement plans be restricted.

The Polish fiasco has its origins in a very sensible move Warsaw made in 1999, when it created a hybrid national pension system. Under that arrangement half of a worker's social security tax went into a private pension plan. The employee chose from a menu of mutual funds, which were owned and managed by local units of 14 eminent financial firms, such as ING, Pimco parent Allianz , AXA, Generali, MetLife and Aegon .

The funds grew and today have $86 billion in assets. The Polish government is seizing the portion invested in government bonds, $37 billion. The equity part? That will be confiscated over time: The government will start helping itself to the equity assets of an individual's pension fund ten years before he or she hits retirement age. With straight faces government officials said that what they were doing--stealing the bonds up front and gradually pilfering the stocks--was a responsible and moderate approach. After all, they reasoned, they could have taken everything now.

Believers in free markets and the rule of law in Poland are reeling. "This is the largest nationalization in Poland since 1946 [when a Soviet-installed Communist puppet regime seized large swaths of the Polish economy]," rightly exclaimed one fund manager. This thievery violates Poland's constitutional guarantee of property rights. But who pays attention to constitutions these days? Certainly not the Obama Administration and much of our federal judiciary. Poland's rationale: Even though the money for the private pensions was deducted from workers' paychecks, it really didn't belong to them, because if the private plans hadn't existed, the government would have taken the money for the government plan; ipso facto, the workers would never have had it anyway.

This move really hurts the impressive progress Poland had been making. Several years ago it undertook a massive privatization program that successfully and skillfully disgorged hundreds of government-owned entities, raising billions of dollars. The process was done in such a way that it helped make Warsaw the financial hub of central and eastern Europe and the Warsaw Stock Exchange the largest in the region. The private pension funds provided a steady source of equity capital that boded well for growth, as new companies could get money for expansion by listing on the exchange.

Keep in mind that by destroying a reliable pool of domestic funding for government bonds Poland will be much more reliant on the kindness of foreign investors, who won't always be so indulgent of reckless government behavior as to buy its paper.

So why did the current regime in Warsaw do something so blatantly self-destructive and immoral? Simple: politics. The incumbents are unpopular, and the economy has slowed down (no surprise, given Europe's general condition). Duped by the false Keynesian dogma that government spending stimulates growth and goaded by the age-old instinct to shovel out money and goodies to buy votes, the Polish pols in power succumbed to short-term temptation. Polish law bars the national debt from going above 55% of GDP. By seizing the bonds and declaring them null and void--voilà!--the pols have suddenly made the restrictions on spending and the resultant deficits disappear, and the spending spigot has reopened. The government thought this thievery would be less unpopular than trying to raise the debt limit.

Poland's stupidity is not unique; Hungary abolished a similar private pension program three years ago.

We all know what happened in Cyprus earlier this year. At the urging of the Germans (of all people) and as the price of a bailout, the government seized a chunk of everyone's bank account. To put a lid on the ensuing uproar, Cyprus' paymasters--the IMF, the European Central Bank and the European Union, i.e., the Germans--decided that deposits of less than 100,000 euros would not be molested. Deposits above that level got walloped--unless you were politically connected, whereby you were given preferential treatment. All monies belonging to government-related entities were spared entirely. Now that this precedent has been set, whenever there's a whiff of financial trouble people will scramble to pull their money out of the banks, exacerbating the crisis. The Germans short-sightedly promoted this kind of bailout in an election year because it wouldn't leave them open to being accused of helping Russian oligarchs, who were big customers of Cypriot banks.

The U.S. is no innocent party to this idiocy, as our fiscal mess and the Federal Reserve's destructive acts attest. Look at our Social Security trust funds, which supposedly have $2.7 trillion in reserves, enough to cover three years of payments. Polish-style, those coffers are empty. The money was spent by politicians as soon as the cash came in. The trust funds are stuffed with "nonmarketable" Treasury IOUs. This means more money will have to be raised to pay these benefits when they come due.

The situation in Poland is indicative of a virus that's infecting many governments and that will make the next financial crisis much worse than it would otherwise be.

For more on this issue's Fact and Comment see here: Restaurants: Go, Consider, Stop