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Keywords:

  • pension scheme;
  • privatization;
  • social security reform;
  • Hungary;
  • Poland;
  • Europe

Abstract

In 1997, Hungary and Poland led Central Europe in partially privatizing their national pension systems, diverting a portion of public pension contributions to privately-managed individual investment accounts. In the aftermath of the global economic crisis, both governments retrenched these second-tier schemes: Hungary (December 2010), by ceasing to fund the accounts and recouping most workers' existing balances; and Poland (April 2011), by reducing the diversion of contributions to the second tier. The factors that drove these retrenchments are traced to the original 1997 second-tier designs, which omitted key specifications related to financing the accounts, private benefit design, and the regulation of private management fees. While both governments tried to compensate for the missing design specifications during implementation, the results were limited. By reducing investment returns and raising borrowing costs, the global economic crisis brought the problems to a head. The conclusion highlights some outstanding issues whose resolution will shape the retrenchments' long-term impacts.