Pension Reform in Hungary : A Preliminary Assessment
Hungary is entering the fourth year of a multi-pillar pension reform that has proved popular among workers despite initially lukewarm support from the government that succeeded the reforming government, and despite the poor initial performance of c...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2001/07/1490137/pension-reform-hungary-preliminary-assessment http://hdl.handle.net/10986/19596 |
| Summary: | Hungary is entering the fourth year of a
multi-pillar pension reform that has proved popular among
workers despite initially lukewarm support from the
government that succeeded the reforming government, and
despite the poor initial performance of capital markets
because of Russia's crisis in 1998. Roughly half the
labor force joined the new system voluntarily. Most who
switched were younger than 40. Many people switched to the
system because it offered more risk diversification. The
pay-as-you-go (PAYG) system, which had been severely damaged
by repeated manipulation of its parameters, clearly offered
a low return on contributions. The new system is still
predominantly PAYG. The first pillar accounts for more than
two-thirds of the total contribution, but the new second
pillar offers the chance of higher average returns on
contributions. Most workers probably intuited the risk and
returns inherent in a pure PAYG system and mixed system,
including the capital market risk in the second pillar and
the political risk in the PAYG pillar. The new system offers
better prospects of long-run risk-adjustment returns for
young workers, and most young workers effectively opted for
the new system. But the new system was probably oversold as
well, making older workers - who would be better off staying
in the reformed PAYG system - switch too. The government has
so far decided not to increase the contribution to the
second pillar from 6 to 8 percent, as originally planned, so
efficiency gains in labor and capital markets may also be
smaller than expected. Addressing projected deficits in the
PAYG system may require further adjustments, such as
delaying the retirement age and shifting to indexed prices,
reducing net benefits to future generations. Reform has
sharply reduced the severe initial bias against future
generation but hasn't eliminated it altogether. The
voluntary switching strategy achieves the same outcome as a
forced switch based on an arbitrarily cutoff age, while
preventing legal problems and contributing to the reduction
of the implicit pension debt. But it leaves a few
individuals worse of the if they'd chosen their best
option - a problem a well-designed public information
campaign can reduce. |
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