THE POST-REFORM SCENE

Essays on the Hungarian Pension System

Introduction

Most of the contributors to this volume took sides in the bitter debates that preceded the paradigmatic reform of the Hungarian pension system that was enacted in 1997. Here they join forces in considering various aspects of the post-reform situation, analysing the old problems that have remained unsolved and identifying the new ones that the reform created.

PART ONE

From the origins to the reform of 1998

DOROTTYA SZIKRA

Modernization and Social Security in the Early 20th Century

This comparative analysis looks at the earliest compulsory social-security schemes in Hungary and certain Western European countries, examining their dates and the coverage they attained. There was little difference between the Western European schemes and Hungary’s in their dates of introduction, but the coverage of the latter was more limited. The reasons for this are examined in the last section of the paper.

KATALIN SZABÓ-CSEMNICZKI

The Hungarian Pension System from 1929 to 1997

The author traces the most important stages in the evolution of the pension system over seven decades. It covers (i) the main features of the 1929 Act introducing mandatory pension insurance for wage and salary-earners in the public and private sectors, (ii) the theoretical debates and systemic changes between 1929 and 1945, (iii) the problems of the immediate post-war period, and (iv) the unifying pension acts of 1952, 1954 and 1959. There is also a brief discussion of the antecedents to the decisive codification in 1975, the arrangements incorporated and the inconsistencies in them. The last chapter presents in thematic form the parameter changes up to the mid-1990s.

KATHARINA MÜLLER

The Political Economy of the Hungarian Pension Reform

This paper places the Hungarian pension reform of 1998 in a broader context. For it was not an isolated event, but one that took place in an international framework of a new pension orthodoxy that draws heavily on the wave of pension privatizations that occurred in Latin America. This important source of paradigmatic inspiration is outlined in the first section of the paper, while the second analyses the political impetus behind pension privatization in Hungary. Finally, the political dynamics of the Hungarian reform is compared with that of the reforms in Poland and the Czech Republic.

PART TWO

The Hungarian Pension System Today

LEVENTE MÁTÉ

The Pension Formula Today

This paper describes the main steps of the calculation that determines the amount of a beneficiary’s pension, in accordance with the pension formulae. The author also illuminates the meaning and interpretation of some social-security concepts, as they will apply to the Hungarian social-security pension scheme in 2001.

KLÁRA MAJOR AND BÉLA MARTOS

The Changing Distribution of Pension Benefits

The inequality of pension benefits has narrowed considerably in the last decade. At the same time, the inequality of the wage that serves as the basis for calculating pensions has narrowed even more. However, the inferences to be drawn from these – surprising and seemingly controversial – results are insufficient to say definitely whether the insurance aspect of the pension system has gained at the expense of the social assistance aspect or vice versa . The authors therefore make a hypothetical split in the pensions, into two additive components: the annuity component and the supplement/reduction component. This decomposition indicates that the system has shifted in the direction of the insurance aspect, not because of system-specific regulatory changes, but rather as the result of changes in relative wages, probably due to the wide-spread misuse of the minimum wage. The paper also details the statistical methodology applied.

MIKLÓS TOLDI

Factors Affecting Entry Pensions in 1998

Using the recently established Pension Determination Database, the paper analyses various relationships unknown hitherto for want of the requisite sources of information. These include the effect of the retiree’s work record, the impact of distinct components of the pension formula, etc. Using the background database for the retirement and disability pensions set in 1998, the paper provides an accurate analysis of these factors, including hitherto unpublished data.

ILONA ANTAL, RUDOLF BORLÓI AND JÁNOS RÉTI

Simulating the Effects of an Improved Pension Formula on Entry Pensions

Some components of the present Hungarian pension formula are inconsistent with the insurance principle (i.e. the close contribution-benefit link) and distort the relative amounts of entry pensions (determined at the time of retirement). Such factors include the low ceiling on the contribution base, the incomplete valorization and degressive rates of valuation of previous earnings, the uneven weightings given to years of contribution, and the relatively lenient qualifications for a guaranteed minimum pension. The authors explore how adjusting these components would influence the levels and relative sizes of entry pensions. To do this, they use the data for more than 25,000 retirees whose pensions were set in 1998.

ÁGNES MATITS

A Brief History of the Hungarian Pension Funds, 1993–2000

Private pension funds have become an integral part of the Hungarian pension system. Although the original concept of those who conceived this institution may have differed somewhat from the pension-fund market as it has actually developed, Hungary is certainly witnessing a rapidly developing process, accompanied by suspicion and conflicts of interests. The author, in setting out to highlight the main aspects of a process in which she has been an active participant, trusts that revealing the past may contribute to improving the efficiency of future management of the pension-fund market.

JÁNOS STAHL

The Pension Yield of Contributions to Private Funds

The paper deals with two weak points in the legislation that provides the framework for Hungary’s private pension funds. The first is the problem of ‘norm benefit’ and the second that of the annuities resulting from the mandatory use of ‘unisex’ (averaged male-female) life tables. Solutions are suggested for both of these.

JÁNOS RÉTI

Survivors’ Benefits in the Two Pension Tiers

The new pension system introduced in 1998 brought immediately perceptible changes in survivors’ pensions. Reforming the survivors’ pension system by creating new entitlements contributed considerably to the political acceptance of the new pension system, while the importance and substance of these fundamental changes were often hard for those concerned to perceive. In the social security pension tier, the new widows’ entitlements meant recalculating 500,000 pensions, at an approximate annual extra expenditure of 17 billion forints. With the private pension-fund tier, people are becoming acquainted with new concepts such as heritability, which played a significant positive publicity role, and the option of an ‘annuity for two lives’. The paper discusses some substantive problems with the complicated system that has emerged and covers the actuarial background to the annuities for two lives.

PÉTER BOD

How Disability Insurance Could Be Covered by the Private Funds

The private pillar of the mandatory pension system that emerged from the reform is not suitable for managing disability risk, although a compulsory scheme that seeks to boost social security should undertake a defined role in compensating for losses caused by disability. This paper presents a proposal for a compulsory scheme of disability pensions that could be financed by extra contributions, on the basis of ‘terminal funding’, and seems able to solve the problem within the framework of the private pillar. The expected costs of the scheme are calculated, by applying several sets of probabilities of disability and mortality and various technical interest rates. The contribution levels necessary with ‘terminal funding’ are compared with those of a scheme that finances the same benefit out of a steady average contribution rate.

RÓBERT IVÁN GÁL, ANDRÁS SIMONOVITS AND GÉZA TARCALI

The Pension Reform as Reflected in Generational Accounting

This paper reports on extensive numerical calculations based on the method known as generational accounting. The main conclusion is that the pension reform, at least under the applied assumptions, has significantly reduced the originally high tension in the pension system. About three-quarters of the net contribution to be paid by future, unborn generations has been eliminated. The bulk of the costs of this improvement are to be paid by the present active generations, but to a lesser extent, retired generations also lose, due to what is known as Swiss indexation. This and the pre-reform increase in the statutory retirement age produce the greatest effects, but those of partial pre-funding of the system cannot be neglected, either. The elimination of degression and the new weights attributed to years of contribution, which are to be phased in up to 2013, have lesser effects that tend to cancel each other out.

PART THREE

The Theoretical Background and the International Environment

ANDRÁS SIMONOVITS

The Financing of Old Age in modern Economic Theory

Economic theory in the last fifty years has paid increasing attention to the financing of old age. The paper sets out to introduce the topic using the simplest possible tools. Section One outlines the Life-Cycle Theory: the consumer saves for old age while working, given an interest rate from the outside world. Section Two discusses the Overlapping Generations/Cohorts models. There the model determines both the consumption path of subsequent cohorts and the interest rate. Section Three presents two examples of how these two theories apply to the pension system. Section Four offers a critical evaluation of the foregoing applications.

MÁRIA AUGUSZTINOVICS

Redistribution in Pension Insurance Systems

The study introduces a conceptual framework for defining and quantifying redistribution in pension insurance. The factors that result in redistribution analysed and classified. Some arise from sharing the mortality risk, so that they can be considered actuarially fair. Importantly, this class is not limited to the length of the life span proper. It includes socio-economic factors whose effects are inseparable from the length of life. Another group of factors concerns discriminatory treatment of individuals and/or groups, so that they are actuarially unjustified, and inasmuch as such factors affect the outcome, the pension scheme concerned can be called ‘redistributive’. This conceptual framework applies equally to public, pay-as-you-go schemes and to private, funded schemes. Hence it supports the comparison of disparate schemes, even between different countries.

ZSUZSA FERGE

Transparent And Messy Contracts – How Do They Promote Social Security?

The central redistributive institutions of the modern welfare state are said to have become economically unsustainable and/or lost social support. There is a consequent retrenchment in the state commitment to welfare. This paper tries to explain how the former ‘contracts’ come to be rejected. Inspired by the seminal ideas of Polanyi, the author defines four patterns of access to resources: (i) one-sided giving without a reciprocal service, i.e. charity or alms-giving, (ii) reciprocity, in which the donation of a service or gift is normatively expected to elicit a reciprocal service, (iii) citizen’s rights in the sense given by Alfred Marshall, and (iv) exchange based on the market principle. The three last patterns of access may be seen as ‘contracts’, including both written contracts and morally binding verbal undertakings. In real life, the principles are combined. When reciprocity is combined with rights and/or the market principle, as in labour contracts or social insurance, the contract becomes ‘messy’. The messy contracts of the welfare era were able to accommodate diverse, often conflicting purposes and interests in the interests of weaker partners. Messy contracts are rejected in the neo-liberal era, which proposes either to return to pure charity and pure market or invents ‘pseudo-contracts’ such as enforced work, which harm social rights and human dignity. It is still uncertain whether the old, socially efficient contracts can be reformed, and if they cannot, whether there will emerge democratic alternatives with some potential to integrate (or reintegrate) societies.

OTTÓ CZÚCZ

Political Risks that Threaten the Predictability of Pensions

Present-day pension systems are under strong political influence from the outset. While describing their changes and transformations, it is certainly justified to distinguish interference ‘based mainly on political considerations’ since those eligible to benefits are entitled to be able to perceive the arguments for changing the habitual operation of the system. This paper focuses on situations where a window of opportunity for intervention by policy-makers is opened by the unbalanced development of the pension system, some of its components, or questionable solutions. The following defences against such attempts are emphasized: (i) strengthening the contribution-benefit link, (ii) raising the main regulatory components to the level of constitutional provisions, and (iii) inserting self-governing structures into the decision-making process. Also discussed is the need for political self-restraint.

LÁSZLÓ GERENCSÉR

Pensions in the European Union

This paper sets out to provide concise information for the general Hungarian reader. It follows the structure of the Communication from the Commission titled ‘Modernizing and Improving Social Protection in the European Union’ (1997). Chapter One outlines the main features of the pension systems in the EU member-countries. Chapter Two describes the social-security regulations concerning migrant workers. Chapter Three focuses on pension issues within that general framework. Chapter Four gives an account of the attempts to harmonize the pension systems in the EU.