Gold – an alternative to open pension funds

OFE or ZUS, or maybe there are better solutions?

There is currently a dispute in Poland regarding the functioning of the pension system. Supporters and opponents of OFE and ZUS are fighting each other over which pension pillar is better and able to secure our retirement. In addition, there are increasingly clear voices saying that OFE should be abolished.

However, the truth is that choosing between ZUS and OFE is a choice between two evils, and in the event of a crisis, both systems will collapse. The OFE scheme works as follows: contributions are deducted from our salaries and credited to our pension account in the OFE. These contributions are then invested and will be paid out to us in the future. So what we have here is a typical investment flow. I put aside one zloty today so that in a dozen or so years, or several decades, I can collect it when I need it, and it will have multiplied. The question, however, is whether the funds accumulated by OFE are actually invested appropriately.  More than half of OFE's assets have been invested in government bonds. Admittedly, they are advertised as a sure profit without risk. But everyone who invested in Greek bonds, guaranteed by the Greek Treasury, recently found out the truth about this claim. In order to protect itself from bankruptcy, Greece forced bondholders to reduce the nominal value of their bonds (by 53.5%) and extend their maturity. It is estimated that investors lost about 74% of the value of their It is estimated that investors lost about 74% of the value of their investments in treasury bonds. Of course, the case of Greece is not an isolated one. For example, in 1998, Russia declared its bonds insolvent, and in 2002, Argentina did the same. Polish governments have also decided not to honor pre-war bonds issued by the Second Polish Republic and do not plan to return the money to their owners, even in part. Of course, the above situations concerned crisis situations, but in the perspective of several decades, there is a high probability that such a situation may occur. And the fact that today the Polish government wants to get its hands on our private savings accumulated in the Open Pension Fund (OFE) confirms that Poland's financial situation may be bleak in the near future.

Of course, the Social Insurance Institution (ZUS) is an alternative to OFE. Its operating model differs from that of OFE. In the case of ZUS, the contributions we pay go towards the current pension payments to existing pensioners. And in fact, this is a model similar to any pyramid scheme. Thanks to the fact that new members join, we are able to pay off old members. However, there is one significant problem with this model. The Polish population is aging and living longer. While today one retiree is supported by the contributions of four working people, in 2030 one retiree will have to be supported by two people, and in 2050 by only 1.4 people. Of course, the creators of the pension reform have provided adequate protection against this trend. This is the Demographic Reserve Fund (FRD), established in 1999, which was to be financed by funds from the privatization of state-owned companies and part of the pension contributions paid by Poles. However, it has not been functioning properly from the very beginning. The first funds were not received until 2002, instead of 1999. In addition, between 2010 and 2012, the government paid out over PLN 14 billion from the Fund, which was used to pay current pensions. However, a reduction of PLN 2.5 billion in the FRD was already planned for 2013 last year. This is what the Monetary Policy Council had to say on the subject: "The draft law provides for the Social Insurance Fund (FUS) to be supplemented with funds from the FRD, even though these funds were intended to mitigate the fiscal effects these funds were intended to be used to mitigate the fiscal effects of population aging in the coming decades. The current use of these savings is not conducive to the long-term stability of public finances." This government policy can be summed up more bluntly as: "After us, even the flood."

So, do we have any alternatives? Since the first and second pillarsand I are mandatory, it is difficult to talk about alternatives. However, we should think about building our own private pension fund, which will be independent of financial crises and resistant to government decisions. One such alternative is investing in gold, which is the only reliable asset that has been in circulation and has maintained its value for over 5,000 years.

Below is a summary of our analysis of potential retirement portfolios invested entirely in gold: * Gold is a safe-haven asset that has historically been used as a store of value and a hedge against inflation. * Gold is a liquid asset that can be easily converted into cash. * Gold is a stable asset that has historically been used as a hedge against economic uncertainty. * Gold is a safe-haven asset that has historically been used as a store of value and a hedge against inflation. * Gold is a liquid asset that can be easily converted into cash. * Gold is a stable asset that has historically

In our analysis, we assumed a 30-year period of saving in gold and a 20-year period of withdrawal of our accumulated savings at the current gold price. For example, the first payment period begins in 1910 and ends at the end of 1939. Then, from the beginning of 1940 to the end of 1959, our accumulated savings in gold are gradually paid out to us. All calculations were made for the US dollar.

The conclusions from the analysis are as follows. The average annual rate of return on such a portfolio ranged from 0.9% to 8.4%, with an average of 4.2%. The average annual rate of return from the beginning of the contribution period to today ranged from 4.9% to 7.9%, with an average of 6.2%.