The mandatory private pension pillar in Hungary: An obituary

Authors


  • The author is also associated with the Central European University and Budapest University of Technology. The author acknowledges the help of the grant OTKA K81483. An earlier version of this paper was given at a workshop at the University of Warwick in January 2010 as part of its European Commission's FP7 GUSTO project. The author thanks Zoltán Ádám, Bernard Casey, Ágnes Matits, Gábor Obláth, Judit Spät and two anonymous referees for detailed comments. The usual disclaimer applies.

András Simonovits, Institute of Economics (HAS), Budaörsi út 45, Budapest 1112, Hungary; Email: simonov@econ.core.hu.

Abstract

In 1998, the left-of-centre government of Hungary carved out a second-pillar mandatory private pension scheme from the original mono-pillar public system. Participation in the two-pillar system was optional for those who were already working, but mandatory for new entrants to the workforce. About 50 per cent of the workforce joined the second pillar voluntarily and another 25 per cent were mandated to do so by law between 1999 and 2010. The second pillar has not improved the financial stability of the social security system. Moreover, the international financial and economic crisis has highlighted the transition costs that are associated with moving, even if only partially, to a system of pre-funding. In 2010, the conservative government de facto “nationalized” the second pillar, and it is to use part of the accumulated pension capital to reduce Hungary's excessive public debt and annual budget deficit and to compensate for income tax reductions.

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