Hungary struggles to rein in runaway pension costs

 

Hungary struggles to rein in runaway pension costs
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Reuters, Wednesday June 3 2009
* Steps taken to remedy pension problems but more needed
* Demographics problems similar as elsewhere in EU
* High debt, taxes, and system anomalies root of problem
By Balazs Koranyi
BUDAPEST, June 3 (Reuters) – Hungary may emerge healthier from reforms forced on it by its economic crisis but its politicians have not done enough to defuse the ticking timebomb that is one of Europe’s weakest pension systems.
The country’s poor demographics, failed reform, heavy and ineffective taxation, a skewed labour market and heavy debt burden all threaten the system with collapse and require quick action, analysts say.
They got some of that from a caretaker technocrat government appointed, after last year’s IMF bailout, to hold the fort and implement painful reforms before elections in 2010.
The new administration has slashed pensions, which account for about 20 percent of total budget spending, and scrapped the indexing system that made pension hikes, even in a time of economic recession, mandatory.
But analysts say there is still much to do — and little sign conservatives Fidesz will implement further reforms if, as expected, they take power at elections in 2010.
“The private pillar is (still) uncompetitive, lacks transparency, it’s expensive and makes poor returns … (and) the public system is bleeding from a thousand wounds,” said Peter Holczer, who heads the Pension Roundtable, an advisory board set up by the government.
Budapest’s finances are now being kept afloat by the $25.1 billion IMF-led rescue package. But it still faces a 6.7 percent contraction in its economy and expects its public debt level to hit 80.2 percent of GDP this year.
Consulting firm Deloitte last year estimated that unless the system is changed, the public pension system’s deficit will go from 0.8 percent of GDP in 2007 to 3.7 percent by 2050.
FEW WORKING
Pension problems are a familiar theme across Europe, where ageing populations and the falling percentage of the population working have prompted many governments to implement politically painful reforms.
But Hungary’s high public debt, high budget deficit and widespread tax evasion make the problem more acute than elsewhere. Unemployment is far from eastern Europe’s highest at 9.9 percent, but, at 54 percent, it has one of the lowest employment rates in the 27-nation European Union.
Disability pensions are perhaps the biggest anomaly in the system and successive governments have failed to address it. Critics say the system is both corrupt and inept.
Over 800,000 people, or more than 10 percent of the adult population receive disability pension and nearly a third of all pensioners are below the retirement age.
“Disability pensions are not a pension issue but a social and labour market issue,” Holczer said. “The state has used pensions to solve social tensions and to keep unemployment down.”
Tamas, 37, who asked not to be named, is nearly completely blind and receives a full disability pension because of that. He is also the CFO of a large international firm’s Hungarian unit with a salary in the top 10 percent of the population.
He tried to get his pension cancelled but simply could not.
“I was sent from one office clerk to another and I was told it couldn’t be done. Once you get it, you get if for life. And I was told that instead of complaining, I should be thankful I’m getting help,” Tamas said.
“It’s idiotic. I earn around 20 times the minimum wage but nobody cares, they keep sending me the money. Fine, it’s free money, I’ll take it.”
BOTCHED REFORM
Hungary has launched pension reform before. In 1997 it put in place an internationally acclaimed system that relied on setting up the “second pillar”, or private funds next to the pay as you go system.
But mediocre fund regulation, poor state administration and frequent regulatory changes resulted in a poor operating figures for the private funds and failed to encourage people to take part.
“Young people today lack any trust in the system and are convinced they’ll never get their money back so they’re not willing to take part in the system,” Holczer said.
Pensioners make up more than 25 percent of the population now but Deloitte estimates that this rate will rise to 35.5 percent by 2050 if the system is not overhauled.
As such, touching pensions is also politically sensitive and government after government avoids the issue to maintain the favour of a key voting block.
Little is known about what Fidesz will do, as polls show, it wins by a landslide in elections due early next year, but analysts say Hungary now has no fiscal room for manoeuvre — at least making any retreat on reforms unlikely.
“It’s pretty clear to people (politicians) that a reversal of reforms would be counterproductive,” said HSBC analyst Juliet Sampson.
“Politicians in Hungary had a lot of leverage for years and they have no leverage now, they can only walk on one path.”

* Steps taken to remedy pension problems but more needed

* Demographics problems similar as elsewhere in EU

* High debt, taxes, and system anomalies root of problem

 

BUDAPEST – Hungary may emerge healthier from reforms forced on it by its economic crisis but its politicians have not done enough to defuse the ticking timebomb that is one of Europe’s weakest pension systems.

The country’s poor demographics, failed reform, heavy and ineffective taxation, a skewed labour market and heavy debt burden all threaten the system with collapse and require quick action, analysts say.

They got some of that from a caretaker technocrat government appointed, after last year’s IMF bailout, to hold the fort and implement painful reforms before elections in 2010.

The new administration has slashed pensions, which account for about 20 percent of total budget spending, and scrapped the indexing system that made pension hikes, even in a time of economic recession, mandatory.

But analysts say there is still much to do — and little sign conservatives Fidesz will implement further reforms if, as expected, they take power at elections in 2010.

“The private pillar is (still) uncompetitive, lacks transparency, it’s expensive and makes poor returns … (and) the public system is bleeding from a thousand wounds,” said Peter Holczer, who heads the Pension Roundtable, an advisory board set up by the government.

Budapest’s finances are now being kept afloat by the $25.1 billion IMF-led rescue package. But it still faces a 6.7 percent contraction in its economy and expects its public debt level to hit 80.2 percent of GDP this year.

Consulting firm Deloitte last year estimated that unless the system is changed, the public pension system’s deficit will go from 0.8 percent of GDP in 2007 to 3.7 percent by 2050.

FEW WORKING

Pension problems are a familiar theme across Europe, where ageing populations and the falling percentage of the population working have prompted many governments to implement politically painful reforms.

But Hungary’s high public debt, high budget deficit and widespread tax evasion make the problem more acute than elsewhere. Unemployment is far from eastern Europe’s highest at 9.9 percent, but, at 54 percent, it has one of the lowest employment rates in the 27-nation European Union.

Disability pensions are perhaps the biggest anomaly in the system and successive governments have failed to address it. Critics say the system is both corrupt and inept.

Over 800,000 people, or more than 10 percent of the adult population receive disability pension and nearly a third of all pensioners are below the retirement age.

“Disability pensions are not a pension issue but a social and labour market issue,” Holczer said. “The state has used pensions to solve social tensions and to keep unemployment down.”

Tamas, 37, who asked not to be named, is nearly completely blind and receives a full disability pension because of that. He is also the CFO of a large international firm’s Hungarian unit with a salary in the top 10 percent of the population.

He tried to get his pension cancelled but simply could not.

“I was sent from one office clerk to another and I was told it couldn’t be done. Once you get it, you get if for life. And I was told that instead of complaining, I should be thankful I’m getting help,” Tamas said.

“It’s idiotic. I earn around 20 times the minimum wage but nobody cares, they keep sending me the money. Fine, it’s free money, I’ll take it.”

BOTCHED REFORM

Hungary has launched pension reform before. In 1997 it put in place an internationally acclaimed system that relied on setting up the “second pillar”, or private funds next to the pay as you go system.

But mediocre fund regulation, poor state administration and frequent regulatory changes resulted in a poor operating figures for the private funds and failed to encourage people to take part.

“Young people today lack any trust in the system and are convinced they’ll never get their money back so they’re not willing to take part in the system,” Holczer said.

Pensioners make up more than 25 percent of the population now but Deloitte estimates that this rate will rise to 35.5 percent by 2050 if the system is not overhauled.

As such, touching pensions is also politically sensitive and government after government avoids the issue to maintain the favour of a key voting block.

Little is known about what Fidesz will do, as polls show, it wins by a landslide in elections due early next year, but analysts say Hungary now has no fiscal room for manoeuvre — at least making any retreat on reforms unlikely.

“It’s pretty clear to people (politicians) that a reversal of reforms would be counterproductive,” said HSBC analyst Juliet Sampson.

“Politicians in Hungary had a lot of leverage for years and they have no leverage now, they can only walk on one path.”