Pension reform in Hungary : a preliminary assessment
AbstractHungary 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 netbenefits 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 2631.
Date of creation: 31 Jul 2001
Date of revision:
Environmental Economics&Policies; Public Health Promotion; Health Monitoring&Evaluation; Pensions&Retirement Systems; Banks&Banking Reform; Pensions&Retirement Systems; Banks&Banking Reform; Health Monitoring&Evaluation; Environmental Economics&Policies; Information Technology;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Laurence J. Kotlikoff, 1995.
"Privatization of Social Security: How It Works and Why It Matters,"
NBER Working Papers
5330, National Bureau of Economic Research, Inc.
- Laurence J. Kotlikoff, 1996. "Privatization of Social Security: How It Works and Why It Matters," NBER Chapters, in: Tax Policy and the Economy, Volume 10, pages 1-32 National Bureau of Economic Research, Inc.
- Laurence J. Kotlikoff, 1995. "Privatization of Social Security: How it Works and Why it Matters," Boston University - Institute for Economic Development 66, Boston University, Institute for Economic Development.
- Feldstein, Martin, 1996.
"The Missing Piece in Policy Analysis: Social Security Reform,"
American Economic Review,
American Economic Association, vol. 86(2), pages 1-14, May.
- Martin Feldstein, 1997. "The Missing Piece in Policy Analysis: Social Security Reform," NBER Working Papers 5413, National Bureau of Economic Research, Inc.
- Demarco, Gustavo & Rofman, Rafael & Whitehouse, Edward, 1998.
"Supervising mandatory funded pension systems: issues and challenges,"
16348, University Library of Munich, Germany.
- DeMarco, Gustavo & Rofman, Rafael & Whitehouse, Edward, 1998. "Supervising mandatory funded pension systems : issues and challenges," Social Protection Discussion Papers 20113, The World Bank.
- Iglesias, Augusto & Palacios, Robert J., 2000. "Managing public pension reserves - Part I : evidence from the international experience," Social Protection Discussion Papers 21311, The World Bank.
- Corsetti, Giancarlo & Schmidt-Hebbel, Klaus, 1995. "Pension reform and growth," Policy Research Working Paper Series 1471, The World Bank.
- Martin Feldstein, 1995. "Would Privatizing Social Security Raise Economic Welfare?," NBER Working Papers 5281, National Bureau of Economic Research, Inc.
- Disney, Richard, 1999. "Notional accounts as a pension reform strategy : an evaluation," Social Protection Discussion Papers 21302, The World Bank.
- Disney, Richard & Whitehouse, Edward, 1992. "The personal pensions stampede," MPRA Paper 10476, University Library of Munich, Germany.
- Vittas, Dimitri, 1998. "Regulatory controversies of private pension funds," Policy Research Working Paper Series 1893, The World Bank.
- Palacios, Robert & Rocha, Roberto, 1998. "The Hungarian pension system in transition," Social Protection Discussion Papers 20048, The World Bank.
- Vittas, Dimitri, 1996. "Private pension funds in Hungary : early performance and regulatory issues," Policy Research Working Paper Series 1638, The World Bank.
- Antón Pérez, José Ignacio, 2006. "The Reform of the Pension Systems in Easterm Europe and these Impact about the Efficiency and Equity/La reforma de los sistemas de pensiones en Europa del Este y su impacto sobre la eficiencia y la eq," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 24, pages 643 (20 pÃ¡, Agosto.
- de Menil, Georges, 2005.
"Why should the portfolios of mandatory, private pension funds be captive? (The foreign investment question),"
Journal of Banking & Finance,
Elsevier, vol. 29(1), pages 123-141, January.
- Georges de Menil, 2003. "Why should the portfolios of mandatory private pension funds be captive? (the foreign investment question)," DELTA Working Papers 2003-12, DELTA (Ecole normale supérieure).
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi).
If references are entirely missing, you can add them using this form.