logo

Marmol Research Budapest

Szilvia Borbély

Hungary: Pension

I. Presentation of the pension scheme

1. The wider and stricter pension schemes

The Hungarian pension scheme may be treated from a wider and a stricter point of view. The wider scheme contain all kind of pension-like assistance while the stricter scheme refer only the after work (that is own right) old age pension. The two types of pensions should be managed in a system as often the not age related pensions function like age related (see for example the sometimes not clear role of disability pension, or the early retirement or pre-pension).

Types of Pensions in wider sense:

    • Old-age pension

    • Own-right pension or direct entitlement social security pension

    • Disability pension

    • Accident allowance

    • Miners' pension

    • Indirect entitlement pensions as

    • Widow's pension

    • Parent's pension

    • Orphan's allowance

    • Accident related survivor’s pension

    • Allowance of members of agricultural co-operatives

    • Pre-pension or early retirement pension

2. Reform in the pension system of stricter sense

In the old pension scheme current contributions of the employed (that is working members) cover the current services paid to the retired ones while no capital stock is accumulated. (This system has been managed by autogovernment and later by the state.)

The logic of the reform according to the Act LXXX (80) contains:

    • The employers’ and the insured persons’ insurance responsibilities.

    • The role of State as regulator and guarantor (if the expenditures of the social security system were higher than its revenues). State shall ensure the safety of elderly and disabled citizens by means of the mandatory social security system and the associated private pension system.

    • The mandatory participation of the insured in the social system

    • The contribution payment obligations of the employers and the insured

The scheme is laid down on the principle of communal responsibility of insured persons, employers and State Both employees and employers shall pay contributions specified by law. The State shall be responsible for the operation and the development of the social security system.

2.1. Three-pillar pension system: the emergence of partially privatised and capitalised system

1997 is the year of adoption of law on the new- so called three pillars - pension scheme, which is radically, differs from the previous only solidarity based, pay-as-you-go scheme. Although the new scheme began to replace the old from the 1st of January 1998, the old system is still surviving as long as there are people who do not choose to enter the new one, and because the old Fund will serve as the first pillar in the new system. The new system is obligatory for employees starting their working life after 30 of June 1998 and may be chosen for others.

The three pillars of the new scheme are as follows:

1. Pension Insurance Fund

2. Private pension funds for obligatory private insurance

3. Voluntary mutual pension funds or the private pension funds for non-obligatory private insurance (operating since the beginning of 90-ies)

The employees' decision to select the new scheme had to be made before the end of August 1999. Those who did not choose to be a member of any private pension fund by that time would remain entirely in the old - pay-as-you-go - system.

While the first pillar of the new scheme is the Pension Insurance Fund, the second - obligatory - pillar is characterised by a capital coverage system, where the future services are calculated on the basis of the capital accumulated on the personal account of the member.

In the second pillar the annuity services become accessible after 15 years, at the soonest. The member will be able to choose different types of life annuity and lump sum payment.

The third pillar consists of the voluntary pension funds, regulated by law in 1993. For the participants it give possibility to tax exemption.

2.2. Coverage and contribution

The amount of contributions and benefits are decided by the legislation power, it is regulated by the Act LXXX of 1997. The coverage of the social insurance pensions is carried out by the contributions of employers and employees. The State shall ensure that the retirement benefits were paid even if the expenses of the Pension Insurance Fund exceed receipts. If the anticipated expenses of the Pension Insurance Fund exceed receipts, the difference shall be secured through central budget allocation. (Act LXXXXI of 1997, § 2 (2)).

In 1999 and 2000 staying with the old system, employees remit the 8 percent of their monthly wages to Pension Insurance Fund, the first pillar. If one has chosen the new pension scheme then 2 per cent of the wage has to be paid to the Pension Insurance Fund and 6 per cent to the Private Pension Fund. (Originally in 2000 the contribution for the second pillar would have been already 8 %.)

The employer has to pay as part of the labour cost 22 per cent of wage to the Pension Insurance Fund. (In 1997 the employer's contribution was 24 per cent and the employees contribution 7 per cent, from what 6 per cent had to be paid to the Private Pension Fund.)

2.3. Establishing and running private pension funds

Act on private pensions and private pension funds, that is the Act LXXXII of 1997:

    • has been adopted by Parliament in order to establish and operate the private pension system.

    • Private pension Fund members shall jointly accumulate the reserves required to operate the fund and provide pension benefits. During the accumulation period fund members shall form an investment risk community, and, in the benefit period, an investment and insurance risk community.

    • The funds shall ensure the performance of their obligations by establishing and maintaining the Guarantee Fund. The normative pension payment is the minimum pension payment to be disbursed to any fund member, the funding of which shall, at the time of the pension calculation, be guaranteed by the Pension Guarantee Fund of the funds.

Private Pension Funds may be established by:

    • Employers separately or jointly, chambers of separately or jointly, professional associations separately or jointly, or together with a chamber (or chambers), as well as employees" and/or employers" interest representation organisations, separately or jointly, or together with the aforementioned entities,

    • The Pension Insurance Administration if such parties project that the number of fund members shall reach 2000 persons.

2.3.1. Private Pension Funds: concentration and expectation

Concentration process

At the beginning of 1998 a severe competition started among the future private pension funds, aiming to attract as many members as possible by the end of August of 1999, when the period of joining the new pension system for those who have been working already ended. Almost half of the future funds was not able to collect the legally prescribed two thousand persons as a minimum for a fund. By the end of September 1999 31 Private Pension Funds had permission to operate.

Only a few private funds - namely six - concentrated 82 percent of the membership of the whole private pension sphere and 74 per cent of the assets (1998). The biggest fund ÁB-Aegon, is owned by insurance company, property of the Dutch Aegon group. Its membership was already greater than 250,000 in November 1998, while its assets exceeded HUF 3.5 billion at the same time. The other five were founded by Nationale Nederlanden, OTP Bank, the Hungária Insurance Company (owned by the German Allianz and Winterthur.)

Among the owners of private pension funds are nine big banks, like the OTP Bank (the biggest Hungarian residential bank), the ABN-AMRO Bank, the Budapest Bank (owned by General Electric), HYPO Bank, Erste Bank, Hungarian Trade bank (MKB), Bank Austria Creditanstalt, Hungarian National Bank, Trade and Credit bank (K&H Bank). Among the owners there are also insurance companies like the mentioned ÁB-Aegon, NN (Nationale Niederlanden), Winterthur, AXA-Colonia. There are also some funds run by companies like Pharmaceutical company Richter Gedeon, the Hungarian Oil Company (MOL), funds of Electrical Industries, the Hungarian Railways, the Hungarian Post, the Hungarian Army. The Pension Fund of Siemens had been closed.

The market of the voluntary funds is also concentrated and usually the actors are the same: 16 of the 320 funds have recruited more than 60 percent of all members, and 25 of them manage almost the 70 percent of the total assets. (1998)

High expectations: rapidly growing voluntary membership

The private funds recruited almost 700,000 members during the first quarter of 1998, and though growth slowed down afterwards, the membership came close to 1.4 million by the end of 1998, and reached 2 millions at the end of September 1999, that one fifth part of the total population and almost half of the economically active population . The great majority of the pension members have chosen voluntary the participation in the new scheme as it is obligatory only for the young people starting their carrier.

The vast majority (80 %) of the members in Private Pension Funds are 20-40 years' old

In the voluntary mutual pension funds were almost 500,000 new members entering in 1997-1998.

The assets of voluntary funds has doubled in the meantime, and exceeded HUF 100 billion by December 1998.

The voluntary pension funds have by now (2000) 1 million members.

During that period the assets of private pension funds came to approximately HUF 30 billion. The collected assets mainly consisted of membership fees, amounting to 80-90 percent during the 1998. The amount of contribution of the founders to the funds' assets was not disclosed in many cases (especially by the biggest funds established by banking groups and insurance companies).

According to some surveys, especially young adults (the primary target group of pension funds) felt their membership fees more secure at these private funds than at the state-controlled social security system and excepted higher return. The feeling steamed from the funds' strong marketing campaigns and also from the state guarantees stressed very often.

According to the experts of SAPRI (2000) the high number of joiners the private funds has not been caused so much by the good understanding of the advantages of the private schemes (which will be seen only after 20 and 40 years) but about the dangers threatening the public pension. The trust in the public pension system has been catastrophically weakened… (SAPRI (2000), p. 26)

Few leavers

Anybody has the chance to decide upon changing fund after he/she has spent six months at least in a fund.

In 1998 there were around 6,000 private fund members who already left behind this sphere and returned to the state controlled social security net. At the end of 1999 the number of persons choosing again the traditional pension scheme increased to 15000. This amount represents only 0.75 % of the total membership of the Private Pension Funds.

2.3.2. Wealth and investment policy of Private Pension Funds

By the end of 1998 the wealth of Private Pension Funds reached HUF 29 billion. By the end of 1999 this wealth increased to HUF 70 billion. The wealth of Voluntary Insurance Funds reached HUF 135 billion. The total wealth of Private and Voluntary Funds, that is the second and third pillar of present pension scheme amounted HUF 205 billion. It means the growth of importance of private pension savings in the households' savings. At the end of 1997 the participation of private funds in the households' savings represented only 1.6 per cent, in 1998 it was 3.2 per cent and at the end of September 1999 it took already 4.4 per cent. (Source: Treasury Supervision, 1999)

Although funds are generally following conservative investment policy, ultimately some of them had lost. The investment policy of the funds is supervised by Treasury Supervision.

In 1999 the Private Pension Funds assets/GDP ratio was only 0,17 percent.

In 1999 the vast majority (85 %) of the assets of the Private Pension Funds was composed by government securities. The same happened in case of Voluntary Mutual Pension Funds. The second biggest part of the assets has been composed by shares (7,1 percent in case of Private Pension Funds and 8.8 percent in case of Voluntary Mutual Pension Funds). In case of Private pension Funds the third mayor part of capital was in form of bank account or cash, while in the case of Voluntary Mutual pension Fund the third major part of capital was held in bonds.

2.4. The State. Principles concerning the social security system

According to the Law on Social Insurance the social security system is a communal responsibility of employer’ and insured persons. Both employees and employers shall pay contributions specified by law. The State shall be responsible for the operation and the development of the social security system in harmony with national economic prospects.

a) The State secures the social insurance pensions for elderly people, the permanently or temporarily disabled and their dependants (guarantor).

b) According to the law the operation and the development of the mandatory social insurance pension system is the responsibility of the State.

c) The State shall secure the operation of the private pension system by enforcing the rules of institutional protection, by maintaining state supervision and by assuming financial guarantees from the central budget for the solvency of the Guarantee Fund, which guarantee the payment of the fund members" claims (guarantor and regulator).(Law LXXX of 1997, article 3. (2)).

 

Agent

Type of service

Source of financing

Pension Insurance Fund based on Solidarity type insurance

The social insurance pension system shall provide retirement benefits to the insured on the basis of uniform principles in the case of

- Old-age pension (own right (direct entitlement) pension), I. pillar of reformed pension system

-Survivorship (indirect entitlement) pensions

  • Widow (er)’s pension

  • Orphan’s allowance

  • Parental pension

  • Accident related survivor’s pension

Financed by the contributions of employees and employers, guaranteed by central budget

Private pension funds (market type insurance)

II. pillar of (reformed) pension system

Obligatory contributions of fund members (employees) specified by the Act LXXX on social security benefits.

Characterised by individual accounts

 

Private pension funds (market type insurance)

III. pillar of reformed pension system

Voluntary contributions of Fund member or organisation for the benefit of the fund member to supplement the mandatory amount

 

The State (central budget)

  • Covers the deficit of Social Security Funds (Health care Fund and Pension Fund)

  • Pensions and allowances covered by central budget but physically paid by the Social Security Funds as:

  • Old age

  • Pensions in case of survivor’s

  • Disability

  • Accidents leading to disability

  • Pre-pensions

  • Pensions by waiving age-limit

  • Pensions for miners

  • Allowances for members of agricultural co-operatives

  

Employer

Early retirement pension

Employer

2.5 Reform of the "first pillar"

Not only the composition of the pension scheme has been reformed but also the traditional first pillar, that is the pension offered by the Pension Insurance Fund.

The most important transformations according to the law (1996) are as follows:

  1. Changing criteria of eligibility, growing age limit (since 2009 62 years for both sexes)

  2. Instead of indexation of pensions based on wage rise, the mixed indexation based on wage and price changes are introduced.

  3. The minimum pensions will be replaced by old-age allowances, and until 2009 gradually ends the degressivity of the wages during the calculation of starting pensions.

  4. Since 2013 the base of calculation of pension will be not the net but the gross income.

  5. The relationship among contributions and allowances will be harmonised around 200-2013.

 

II. Current problems: insufficient income, accessibility, etc.

Current social and sociological situation

Growing number and proportion of pensioners due to age structure and inactivity

  • The number and proportion of pension-age population is increasing.

  • The number and proportion of working-age inactive population is high and until 1998 it was steadily growing.

  • Paradox of pension age: it is low and high at the same time. Low from the point of view of fund-collecting capacity of the Pension Fund. It is high from the point of view of high working age inactivity (mainly due to the structural changes of economy, unemployment, low level of workplace health and safety, etc.). The increasing age limit for retirement does not solve totally this situation: although it would mean mayor income for the funds but it would deepen the other problems originated in the low level of activity, bad health conditions of the population, etc.

Notwithstanding according to SAPRI report (2000) the role of pension system as a safety net has been reduced clearly from 1998 as the figures do it indicate too.

1000 persons

1990

1996

1997

1998

Total number of pensioners

2520

3082

3123

3157

Old age retired in the given year

84

47

42

33

Disability and early retirement

88

96

98

66

Source: Yearbook of CSO, 1998, pp. 153-154, in: SAPRI (2000), p. 23

New forms of work

The appearance of the atypical works - among others the growing number of self-employed - as well as the so called grey employment (the employment on minimum wage) has strengthened the importance of the third pillar two and the different kinds of life insurance combined with life annuities. They are offered not by the voluntary mutual funds but by market-type insurance companies (who otherwise own in many cases the private insurance funds).

Consequences

  • Financial Input problems

  • Financial Output problems

  • Budgetary problems (Solidarity based Pension Fund budgetary deficit, during the latest years efforts to bring the deficit of the social security system under control have failed).

  • In long-run growing inequalities among the pensions

Deteriorating pensioners' situation

According to the SAPRI experts (SAPRI (2000), p. 26) the deterioration of the pensioners' situation since the change of regime was smaller that of the whole population but greater than that of the active earners. The relative situation improved in 1998 somewhat when the full indexation to wages was still applied. (In 1999 already the Swiss indexation worsened the relative situation of pensioners).

1989=100

Year

GDP index

Real income per capita

Real wage per wage earner

Real value of provisions per pensioner

1989

100

100

100

100

1990

97

98

96

97

1991

85

97

90

90

1993

82

89

86

83

1995

86

86

80

76

1996

87

86

76

69

1998

96

-

83

73

Source: Yearbook of CSO, 1998 in SAPRI (2000), p. 27

The situation of pensioners has been deteriorating for the following reasons:

  • Low income: low contribution, low pensions. Notwithstanding of the high percentage of contribution on wage, the low absolute level of the income results low pensions. The real value of the average pension decreased more than that of wages.

  • The number of pensioners still working dropped substantially (from 440.000 (1989) to 110.000 (1998).

  • The situation of single pensioner has been deteriorated even more than that of a pensioner couple (in 1995 the income of a single pensioner was lower by 39 % and that of a pensioner couple 23 % than the income of similar families with active head. (SAPRI (2000), p. 28).

  • The people living from social assistance are in harder situation than pensioners. The minimum pension is higher than social assistance.

  • The pensions have a minimum and a ceiling too.

Problems of value-maintaining by benefit indexation

According to the Act LXXXI of 1997 on social insurance pension the benefits would be increased partly (in 50 %) "to the extent corresponding to the weighted average of the consumer price increase measured in the first three quarters of the calendar year and partly (in 50 %) according to the average gross national wage increase." The problem consist on the on the content of the basquet according to what the inflation is calculated and on the a posteriori increase of pensions.

According to the same Law in 1997 the pension in 1999 should have been fully indexed to wages and the mixed type of indexation (the so called Swiss indexation) ought to have been applied only in the subsequent years. This would have meant an increase of 18-19 % in 1999 instead of the realised 11 %. The Constitutional Court majority did not consider this step unconstitutional albeit the votes were divided. 1998 was only the second year after the regime change when the real wages increased considerably so that the former losses of the pensioners would have been some extent compensated.

Monitoring deficits

Pension Insurance Self-Governments were managed until spring 1998 jointly by employers and employees. The Act LXXXIV of 1991 regulated the governance of social security self-governments. The Act has been applied since 1993 following the election of representatives of social security. The last election of the employees’ representatives in the Self-Governments of the Health Insurance and Pension Insurance took place in 1997. The employees had the possibility to choose from the trade unions representatives. This practice of elections had a trade union legitimating role too. The activity of auto-governments was ceased following the 1998 parliamentary elections and the victory of the new coalition.

The public control of pension fund has been totally abolished. The assets given formerly to Public Insurance Fund as a reserve have been sold by the Government, as the deficit is covered directly by the budget.

Slowing down the original transformation

According to the law of 1997 after two years of transition the members of private pension funds should pay the 1/4 part of their pension contribution to the private fund and the other 3/4 to the Pension Insurance Fund.

This process slowed down and the government froze at 6 % the compulsory private contribution rate (which was planned to increase up to 8 % in two years), fearing from the Pension Insurance Fund huge deficit.

Deteriorating disability scheme

The stricter eligibility and screening rules for disability pensions are introduced without the implementation of a system for the retraining and rehabilitation. In 2000 the situation for disabled has deteriorated as the state subsidy for the companies which employ disabled was reduced by 20 %.

 

III. Sustainability of pensions in the long-run

The reforms, the introduction of three pillar system and the reform of the first pillar as changing criteria of eligibility, growing age limit, instead of indexation of pensions based on wage rise, the mixed indexation based on wage and price changes, and the harmonisation of contributions and allowances until 2009-2013, aim the long-term sustainability of the system.

As regards the first pillar until 2013 SAPRI experts wait:

  • somewhat hardening of eligibility criteria, as well as

  • the pensions will not been fully indexed to the wages,

  • the regressive elements will continue to be applied so that the scale of pensions will be increasingly compressed, so the pensions will become even less wage-related than before. (The regression rules will be abandoned after 2013, but part of the wages taken as basis for calculating the pension will be reduced. Employers pay the full payroll tax, while there is a ceiling for the employees both for contributions and for the basis of the pension. The ceiling is twice the average wage.)

The sustainability in the long run may be in risk for the following reasons:

  • The majority of problems presented in the today' s pension scheme possibly will survive in 2010 too.

  • The Pension Insurance Fund liquidity problem possibly will not decrease but increase. In consequence of big success of second pillar in the pension scheme the deficit of public pension fund has increased meaning a higher burden for the State than it has been waited.

  • The third pillar, the voluntary private funds are attractive for tax exemption possibilities for the employees and the possibility to increase wages without increasing tax and social insurance costs. The future attractiveness of this pillar will in great depend on the level of present tax and fee exemptions.

  • High contribution from the employer and employees point of view will survive.

  • Low level of assistance from the point of view of the retired person will survive.

Possibly increasing burden on the "zero" pillar

In the pension scheme introduced in 1997 the Sapri experts (SAPRI (2000), p. 23) call "zero" pillar "the provision for those who cannot fulfil the eligibility criteria. This benefit was defined by an amendment of the Social Act (accepted simultaneously with the pension act) transforming the earlier regular social assistance into an old-age provision." Although originally relatively few people get this benefit (28 thousands in 1998), it's importance is excepted to grow as an increasing number of people will not be eligible for pension (the minimum contributory period increased from 10 to 20 years, for example.) It will positively influence the pension scheme sustainability but negatively the State budget.

Problems of input

Decreasing income level of Solidarity based Social Pension Fund because of growing number of people (young people) and atypical workers, self-employed entering the Private Funds, Voluntary Mutual Funds as well as choosing life insurance and annuities combination.

Private Funds: decreasing investment possibilities in short term (money market recession, decreasing activity of the Hungarian share market).

Optimistic view from 1998: the State Fund Supervisory Board predicted if the present trend continued, all assets of the pension funds would exceed 8-9 percent of household savings by 2002.

Condition of sustainability: permanent updating of the system

As the economic background is permanently changing, different shortcomings may appear. It would need a permanent updating of the system through legislative or regulatory change. For example the rules calculating the pensions are to be changed several times until 2013.

The problem is that this updating has to respond to the needs generated from the changes of economic environment and not from political needs.

Low level of pension funds assets/GDP

In 1999 in Hungary the Private Pension Funds assets/GDP ratio was only 0,17 percent. The similar ration in Italy is 3 %, in Germany it is 5.8, in the USA it is 60 % Great Britain it is 74,7 %, in Netherlands it is 87,4 % and in Switzerland it is 117 %. According an IBRD expert a pension system can be considered as mature if the assets managed by the treasury equals at least 50 percent of the GDP. Hungary is excepted to have a sound capital adequacy in 2028.

Uncertain future of private funds

The future of private pension funds, as second and third pillars may be considered more risky than that of the Public Insurance Fund. The risks are cumulative, the 20-50 years private savings depend on the performance of economy, performance of funds, etc. (Ország, Stiglitz (1999) According to this the "probability of the relative (maybe even absolute).deterioration of the standards of the pensions is higher than the probability of their improvement…"

 

IV. Plans for future pension reform

The implementation of pension reform - supported by World Bank - has been gradual. Between 1990 and 1996 three Acts were passed:

  • the Act on the elected governing bodies,

  • the Act on voluntary pension funds and

  • the Act on gradual increase of the retirement age to 62 years for both sexes to be reached in 2009.

The debates were restricted mainly to the experts and politics, accompanied by a wide positive communication campaign for the public at large. August, 1999 as the peak of this campaign, as a result a huge majority has chosen the new scheme having confidence in it.

Since then the government communication on pension has been diminished to a minimum level.

Increase the income of funds

  • Contribution for Private Pension Fund should rise to 8 % of the income (proposal of non-ruling parties).

  • Instead of 30 and 27 % of social security contribution planned originally by the government for 2001 and 2002 should be introduced 31 and 29 % (ruling-parties proposal).

 

II. Influence and relevance of the international and European levels on policy-making at national level

 

In the development of the new pension system the following regulating principles were kept in mind.

  1. Principles based on World Bank

World Bank requirements based on loan agreements and implemented during the Hungarian pension reform process:

  • stricter eligibility rules
  • reduced public pillar and lower standards
  • a funded private pillar

a) In the early nineties the loan agreements between Hungary and the World Bank had as important aim the reduction of the ratio of pensions within social expenditures. The emphasised tools were:

  • reduction of pensioners modifying the eligibility rules (1992),

  • "re-screening" of disability pensioners, hardening eligibility rules for disability pensions, the pensioners' stimulation to re-enter the labour market (1995).

b) Since the middle of nineties the idea of privatisation has been underlined. The Averting the Old Age Crisis, World Bank (1994) study concerned the multi-pillar pension system, with a minimum pension, a voluntary insurance and a dual wage related scheme, one part of which would be a pay-as you go social security scheme and the another a compulsory private pension based in individual savings account. The liberalisation of pension scheme has been firmly supported by the Ministry of Finance.

  • Growing role of market forces (deregulation), decrease of role of the State

  • growing role of individual income and individual responsibility, decrease of solidarity

  • as consequence: growing efficiency of the system with the introduction of second and third pillar of the new pension scheme, decreasing burden on budget and employers in long run

  • Although a smaller portion of pensions should be covered by contributions paid to mandatory private pension funds, the principle of self-support must be enforced.

  • Pensions connected to actual contributions shall encourage larger participation in the mandatory system.

  • Contributions payable by employers shall be more proportionate, and moderate in the long run.

Remark: Neither the World Bank, nor the government or even the then opposition in the parliament took into consideration the opposed opinions concerning the introduction of the compulsory private pension.

According to Joseph Stiglitz (former Word Bank spokesman) the Post-Washington consensus started to be formulated 2-3 years ago has as broader goal the environmentally sustainable, equitable and democratic development as a goal.. Investing in education to build human capital is an example of a policy which promotes the achievement of all these broad goals. But there may be trade-offs, eg. between economic growth and income inequality… (Stiglitz (1998). In Sapri (2000), p. 15)) The new consensus would mean probably the recognition of a

bigger responsibility of State.

Despite of the emerging so called Post-Washington consensus, the two loan agreements concluded between Hungary and World Bank since then - a loan agreement concerning the higher education and another the pension system reform- does not yet reflect the possible new "wave". "The World Bank loan for the pension system reform aimed mainly at easing the difficulties due to the introduction of the compulsory private pillar. The World bank loan is needed since there is a substantial withdrawal of resources from the public pillar due to privatisation - but it is going to increase the burden on the country on long run. Despite this the World Bank, several Hungarian economists and obviously the lobby of the private insurance companies push for further significant enlargement of the private pillar. There is a growing number of foreign and Hungarian professionals though who in addition to earlier protesters consider it a professional and political mistake to have introduced the private pillar under the given circumstances, and who believe that this measure is not in conformity with the post-Washington principles either." (Sapri (2000), p. 16)

 

2. EU "new governance"

"Benchmarking" and solidarity

  • The current and expected level of pensions shall not decrease in the three-pillar system.

  • Rights accrued earlier shall not be curtailed.

  • The burden of personal pension contribution shall not increase.

  • The pensions of current pensioners shall be guaranteed by the new scheme of financing, too intergenerational risk-sharing affecting the entire society shall be maintained.

  • The larger part of the pension system shall remain a pay-as-you-go scheme.

  • Intragenerational social solidarity shall be enforced by a system of social benefits, separate from the pension system.

  • The new system shall be linked to adequate supervision and state guarantee

  • The solidarity element has to be kept, as it is taken for granted that the market mechanism inevitably disadvantage certain groups and limit the satisfaction of needs in case of insolvency. The essence of the political consensus is that the results of economic development should reach the widest possible strata of the society and they should serve social integration as well as the reduction of the inequalities of opportunities. (see Sapri Report, 2000).

 

3. Contradictions of World Bank and European social policy traditions

The social policy recommendations formulated on the philosophical background of the "Old Washington Consensus" are sometimes in conflict with the European social policy tradition.

The Washington consensus does not deny the validity of the solidarity and equal opportunities: it simply ignores them. Concerning the public responsibility it simply declares that it should be as small as possible. That is why the recommendations formulated in line with the Washington consensus were not able to take into account the shared "European" social values. (Sapri (2000), p. 13)

 

Some dilemmas

With the introduction of new pension scheme the following questions may be raised:

Does the new scheme solve the former problems of the pension scheme based only on the pay as you go system,

namely

  1. the pension fund deficit,

  2. the problems caused by the age structure and health condition of population,

  3. the long-term relationship between contributions and pensions will be guaranteed?

Did the introduction of new pension scheme bettered the situation of pensioners today?

  • Will the new pension scheme better the living standards of the present and future pensioners?

  • Will the new scheme in long run solve these problems?

  • Will the new scheme offer an adequate level of subsistence for the retired people?

  • Will it to contribute to the growing inequalities or not?

  • Will it mean in long run a less burden for the State?

  • The role of pension system as a safety net would be disappeared?

The question of pension as a safety net. What to do with the high dependency rate? How to lessen the high dependency rate?

The pension is not any more the question of age. Growing number of working age pensioner. Pension as solution against unemployment. See the distribution of pensioners, and the different kind of pension. The growing role of the pension system as a safety net in Hungary until 1998. Maybe the pension system a kind of safety net or the two roles must be clearly divided (as in the World Bank philosophy)? According to the World Bank recommendation the defence of poor people is possible by means of safety net. The Word Bank's recommendation have not totally been applied: no adequate safety net has been developed (the adequacy is twofold: everybody in need should be reached by the assistance, and the volume of assistance should be adequate).

Has the positive discrimination any place in the pension schemes or it should be treated as task of social care?

  • EU philosophy: positive discrimination: as regards young people, disabled, old, as well.
  • To abolish the age related wage system the pension should not depend on the income of last few years, but on the income of all working life.
  • Multiple disadvantageous situation: pensioner with children, disabled pensioner with children (In Hungary 354 000 persons, 96 000 families with one or more children living from pension)
  • Unemployment and pensions, low level of health and safety at workplace, bad health state of the employees, low possibility to find work after 45 years old = growing number of applications for disabled pension, and growing number of non accepted applications

How to finance the growing demand?

Looking the pension like assistance in system: growing demand for pension because and for every type of pension because of concomitant presence of the

  • characteristics of age pyramide in Hungary (demand for old age pension)
  • consequences of sudden structural change in the Hungarian economy (demand for pre-pension, pensions waiving the age limit)
  • consequence of not looking or applying at the workplaces the health and safety (not low but harmonised with the EU) standards (demand for disability and accident disability pension)
  • Consequences of sudden social changes: growing number of psychiatric illnesses
  • Environment problems and growing risk and number of illnesses (cancer), etc.

Has the solidarity a future?

Growing income and social inequalities and the future of solidarity.

Another basic problem: well paid employees preference regarding private pension funds. It mean that in long run the income of Pension Insurance Fund would increase slower than of the Private Pension Funds. In long run it would mean a burden for the central budget. Modernising economic structure, modernising workplaces, changing structure of labour force, economic growth and increasing inequalities in income. Will the solidarity survive or not?

Would the Private Pension Funds answer to the requirements? Is the danger of cumulative risks real? Private pension fund and the voluntary mutual pension funds capital accumulation depends not only on the members' contributions, but on the performance of stock market, bank interests, government securities income, etc. that is on the fiscal and monetary policy as well as on the expectations and insecurities of the money and capital market.

Decentralisation with recentralisation? Is the civil control important in case of public pension funds or not?

One of the purpose of the Hungarian pension reform was the decentralisation of the system. Since 1998 happened the opposite. In 1998 was abolished the electing governing board exercising some civil control over the public pension Fund.

There was a gradual recentralisation:

  • The Tax Authority was empowered to recollect the insurance contributions
  • The assets given earlier to the fund as reserve have been sold by the government.

 

 

CEEC and EU policies: what can we learn from each other?

During forming its social policy, social reforms and schemes CEEC should take into consideration the following:

  • EU philosophy, Copenhagen criteria

The Copenhagen declaration require

  • "urgently implementing national strategies for eradicating absolute poverty by a specified data and substantially reducing other poverty in the shortest possible time"
  • "transparent and accountable government with full opportunities for public participation at national and local level"
  • "to promote social integration by fostering societies that are stable, safe and just, and are based on the promotion and protection of all human right, and on non-discrimination, tolerance, respect for diversity, equality of opportunity, solidarity, security and participation of all people including the disadvantaged and vulnerable groups and persons.

(On the basis of Copenhagen Declaration the Hungarian Parliament ratified European Social Charter, law on the equal opportunities of handicapped people. There have been efforts to increase employment too. But poverty did not become a government concern. No national strategies were worked out to fight against deep poverty or poverty in general. There were no endeavours to reduce inequalities, or te weaken the processes of exclusion. "On the contrary there is a tendency to accept poverty as a natural corollary of social life" SAPRI (2000), p. 67-68).

  • Practical solutions: good practice

Two types of social system

Idealtype

Real type

System based on prevention

  • respect of human dignity, fight against prejudices
  • growth of employment
  • growth of living wages
  • improved social security
  • guaranteed minima

Poverty alleviation

Not overestimating the spontaneous effect of economic growth: it will not solve spontaneously the problems of poverty through "trickling down"

Relying on and counting with the " trickling down syndrome" (World Bank supposition)

Need of national-level strategies to alleviate poverty

No national strategies, only fragmented measures and tools

Growing (but far not absolute) role of local authorities in the social policy (better feedback, higher "take-up rate", but problems of unequal resources, etc.-)

Only centrally regulated and performed social care

"Optimal social state"

"Minimal social State" as a doctrine which accepts the extreme poverty as "natural"

Regular assistance

Crisis help, social assistance

Coherent and consistent system of benefits, social services and the concomitant contributions

Partial measures and partial regulation

Benefit system: protecting family as a whole

Protecting elements of family, protecting children, unemployed, old age, handicapped, etc.

Assistance reaching everybody in need. (High "take up rate"

Assistance reaching only part of the people in need (lack of information, fear from discrimination, etc.)

Adequate level of social benefits covering subsistence

Low level of social benefits with supplementary role.
   

 

 

 

 

 

 

 

Sources

Act LXXX on persons entitled to social security benefits and pensions as well as the coverage of these services (adopted in July 15, 1997)

Act LXXXI on the social insurance pension (1997)

Act LXXXII on private pension and private pension Funds (1997)

Averting the Old Age Crisis, Policies to Protect the Old and promote Growth, (1994) World Bank Policy Research Report

OMKMK (2000) Laky Teréz: Munkaerőpiaci helyzetjelentés, Budapest 2000

Ország Péter R and Stiglitz, Joseph E. (1999) rethinking Pension reform: Ten myths about social security systems, Paper presented at the Conference on "New Ideas about Old Aage Security", The World Bank, Washington D.C.

SAPRI Report (2000) on the World Bank Structural Adjustment Program Loans to Hungary, 1988-1998, Ist Working Group, Zsuzsa Ferge, head of the working group

Stiglitz, Joseph E. (1998) More Instruments and Broader Goals: Moving toward the post-Washington Consensus. Wider Annual lectures 2. The United Nations University, January 1998

E-mail