European Trade Union Institute, ETUI.

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Pensions reforms in Hungary - background summary

Characteristics of the Hungarian pension system

  • A multi-pillar system was created in 1997 in Hungary.
  • The first pillar is the state-run, social security pension pillar; the second is the private pension fund system; the third is the voluntary private pension fund system.
  • The voluntary private pension fund system is also divided into four more pillars: a) supplementary private pension funds, b) the pre-retirement saving account; c) the occupational pension scheme, and d) products of private insurance.
  • Until the end of 2010, the mandatory pension system was a two-pillar system: the first pillar was the social security pension system and the second pillar was the private pension fund system.
  • Three-quarters of the pensions of those choosing the mixed system have been paid for from the first pillar and the remaining quarter has been provided for from the second pillar.
  • The private pension fund members had to pay 6 percent of their taxable income to private pension funds in 1998, 7 percent in 1999 and 8 percent in 2000. The membership fees paid by the members were transferred to their individual accounts.
  • They also had to pay a reduced contribution of 1 per cent to the state pension fund in 1998. In 1999, 2000 and 2011 this contribution was 2 percent.
  • The employer’s pension contribution was 24 per cent in 1998, 22 per cent in 1999 and 2000, and 24 per cent in 2011. 

An overview of pension reforms in Hungary

  • The declared objective of the 2010 pension reform in Hungary was ‘to return to the two-pillar pension system, based on social solidarity, on the one hand, and to voluntary contributions on the other hand’. Theunderlying objective was to increase the fiscal space of the government by re-directing private pension funds into the state coffers (at a value corresponding to cca 10% of Hungarian GDP).
  • On 13 October 2010, the Orbán administration announced that it would divert the 8-percent-of-gross-wage private pension fund contribution of Hungarian employees to the state for a period of 14 months, beginning in November 2010.
  • The declared objective was a temporary diversion of mandatory private pension fund contributions to the state, but with the creation of a ‘fait accompli’ situation the diversion became permanent. The aim was to help the Orbán government to reduce the central budget deficit to the 3% of GDP and to cover the fiscal gap created by the planned introduction of the flat personal income tax. A substantial part of the acquired private pension funds were used to cover current expenditures and to gain Hungary’s removal from the European Union’s Excessive Deficit Procedure.
  • From 3 November 2010, entrance to the private pension funds was no longer required for new entrants to the labour force. Around 3.2 million fund members were left no other realistic option than return to the social security pension system.
  • By 31 January 2011 the private pension fund members had to declare if they wished to maintain their membership in the private pension funds, amid threats that when remaining they lose their entitlements in the state run system.
  • Those who failed to make a declaration automatically entered into the first pillar and they lost their private pension fund membership.
  • Only 3 per cent of the full members decided to stay in the second pillar pension scheme.
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