On the verge of collapse, Hungary’s pension system is undergoing major changes these weeks. The reform could not have been achieved without people’s will and trust. Every Hungarian employee who was affiliated to a compulsory (!) private pension fund had a choice to decide by 31 January 2011 on staying with the private pension fund or transferring to the public pension system. 97% of beneficiaries trusted and returned to the public scheme, giving rise to a new two-tier arrangement which reset the balance of the public pension system.
Mr Orbán’s Government received from its Socialist predecessors a public pension system on the verge of collapse with a HUF 900 billion deficit. Nearly every third forint meant to cover pension payments was missing.
Thus last December, Viktor Orbán’s Government decided to terminate the compulsory affiliation to pension funds, a unique arrangement in Europe with multiple drawbacks. This strange third pillar in Hungary, which had been in place since 1998, forced employees to have a portion of their pension contributions transferred to a private pension fund. This resulted in a huge deficit and severely endangered the operation of the public pension system. In addition, compulsory affiliation did not bring the expected results to citizens.
The Government followed suit of several other countries and decided to set up a two-pillar pension system, built on affiliation to the public pension system and a private pension fund. Pension fund members had a chance to decide by 31 January. 98% of pension fund members (nearly 100,000 people) trusted the Orbán Government and decided to return to the public pension system. Of course, those affiliated to the public pension system can now complement their pension savings with voluntary savings.
The high number of returning people almost reset the public pension system’s balance and the Government assumed a statutory guarantee to use pension contributions for only two purposes: paying pensions and reducing sovereign debt. As opposed to recent government policies, this commitment is reassuring after both Socialist governments began to use up and finance the public pension system from credits.
But there is more to the Hungarian pension reform. Earlier this week, Mr Orbán talked about plans to stop each able-bodied person of working age in Hungary from escaping to pension benefits. The number of disability pensioners is irrationally high (750 thousand of 2.7 million pensioners) as several people have preferred pension benefits to working without any good reason.
Hungary’s dwindling population made the pension system reform inevitable. Since the late 1980s the country has seen an unfavourable demographic trend exacerbated by the austerity measures in recent years, with a steady decrease in the number of births and the overall number of the population dropping below the psychological limit of 10 million. The state has a hard time providing pensions to a continuously ageing population and has no recourse but to pay unemployment benefits to every other person of working age. Now 100 active Hungarians are supporting 38 pensioners. With the current demographic trends, this number could rise to 88 by 2050 and 107 by 2100.
Consequently, the Government has managed the pension system reform in close correlation with economic issues. 1 January 2011 saw the establishment of a single-rate tax system which has brought about a particularly positive change in the lives of Hungarian small and medium sized enterprises and people raising children. The Government’s economic policy is clear: the country needs more births, more jobs and more working adults for economic recovery, as a way out of unemployment and to have a sustainable pension system. (kim.gov.hu)