Thursday, 18 October 2012

Hungarian pension disparities

Pensions and government benefits for senior citizens are both a big and controversial component of state expenditures all around the developed countries - Hungary is no exception. Government expenditures on pensions made up 10.1% in 2002 - roughly the same amount as in other European countries, but the ratio of pensioners to the active workforce is very high. This article deals with the question of economic sustainability, political gridlock and pension disparities.

Source: www.towntalk.co.uk


Sustainability


The current Hungarian pension system is based on two  pillars; direct cash transfers by the state to senior citizens, and to a lesser extent, self-care. Formerly, the third pillar was private-pension funding - but in 2011, the current government nationalised these assets, and henceforth the funding of the pension system became a PAYG (pay-as-you-go) one, which means that all pensions are direct cash transfers from currently working citizens to the retired.
This scheme is a heritage of the Communist era - following the revolution of 1956, the hugely unpopular regime tried to 'buy' popularity (successfully) by creating a bulky pension and subsidy system. While this had grave effects for both Hungarian saving mentality and the debt-to-GDP ratio, the system managed to survive the 1989 System Change intact.
Nowadays, according to the National Pension Insurance Authority, 1,959,202 Hungarians are receiving cash transfers for retirement alone - this excludes the disabled and disadvantaged, and compromises a whopping 19% of the total Hungarian population. Currently, there are 70 retired people for every 100 of working age. But nothing tells more about the controversy of the system than this graph. (Click to enlarge)

Source: "Jelentés a magyar nyugdíjrendszerrôl". Translation: Report on the Hungarian pension system.
By: Gaál, Róbert Iván, 2002, www.kormanyzat.hu
People born approximately before 1928 are beneficiaries of the current pension system (instituted originally in 1945); the net balance of state expenditures for them is negative. After 1928 however, things change. Ever since then, every citizen pays more to the state in his lifetime than they get back - in an ageing society, people have to support more and more senior citizens. Doesn't this awfully sound like a Ponzi scheme?

Political gridlock


While the Hungarian pension system is sustainable in it's current form until 2030, the amount of it's handouts and the aforementioned controversies have been a target of frequent scrutiny. Yet Hungarian politicians are afraid of any reforms of the pension system - on the contrary, the current government's move was primarily aimed to comfort the aforementioned pensioners, who compromise 19% of total voting population. Domestic online media generally dubs pensioners 'sacred cows' - the socialist prime minister, Mr Gyurcsany resigned after he found that due to an EU-imposed austerity programme, he'd be unable keep the 7% pension increase (dubbed '13th month pensions') he instituted when he came to power.

Disparities


The trap of the current system is that even though working-age population has to work unjustly hard to support the retired population, pensions are hard to take away not just politically, but economically as well. The following chart, compiled from data published by the National Pension Insurance Authority, shows that most of Hungarian's senior citizens earn abysmally low pensions. (Click to enlarge)

Data source: HVG, Graph source: Schoolonomic
The case is clear - an overwhelming majority of Hungarian pensions are below 100,000 HUF per month, the equivalent of 471 USD or 292 GBP. That is a mere 38% of the US minimum wage - and around the domestic one. With increasing pension payments, but decreasing received pensions, the future looks bleak for the Hungarian pension system. 

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