Information on the current situation concerning the pension reform in Hungary

The Hungarian pension system, description of pension reform. The Hungarian mandatory pension system comprises of two pillars.
The first pillar is a public pension pillar, financed on the basis of pay-as-you-go.
The personal  scope virtually covers the entire population of employees and the self-employed. It provides benefits for 2,8 million people: the average pension is 60% of the net average wage, pension expenditures are about 9% of the GDP.

The first pillar public pension scheme provides old age, invalidity and survivors" benefits. For old age benefits, the minimum service time for being entitled to a partial pension is 15 years, to a  full pension is 20 years. Retirement age for male is 62 years, while for female is currently 58 years, which will be increased to 62 by 2009. The amount of pension depends on the partly valorised net wages as well as services time. Rules for calculating pensions are degressive, long service time is devalorised. New rules concerning a linear calculation method will be introduced by 2013, by which redistribution will be reduced.

The system of mandatory savings within the second pillar private pension schemes was introduced in 1998. It is mandatory for new entrants, while those being previously insured could opt for the mixed system. Those who opted for the mixed system, will receive 75% benefit provided through the first pillar and they pay approximately 1 of their total contribution to the second pillar. However, due to both decreasing contributions of employers and increasing contribution rates, this ratio is currently changed.

During the accumulation period, private pension funds invest contributions, while in the period of disbursement they provide life annuities. In case of a contribution period shorter than 15 years, payment of the total sum of contribution can be claimed. Life annuity might be provided for the whole life of the person concerned, or for more people. Contributions paid during the accumulation period can be heritable. Invalidity or survivors? benefits are not provided by the second pillar scheme, although in these cases there is the opportunity to get back to the first pillar scheme.

More than half of the insured population are covered by the second pillar. deficits of the first pillar, due to contributions paid into the second pillar are financed by the central budget. This amount is somewhat more than 1% of the GDP.

Guarantee rules:
There is no direct guarantee for the amount of annuity (the norm annuity has been eliminated in 2001). If a private pension fund is not able to provide its member with benefits, so the account receivable is frozen - due to opting in or out of the public pension scheme, or in case of death of the member concerned -, the missing amount has to be paid by the Guarantee Fund. It is also the task of the Guarantee Fund to establish the financial cover of disbursement of life annuities. There is a number of indirect guarantees within this system: Supervising the Funds, legislative measures for the management, investment, minimum and maximum return, creating reserves etc.

Contribution payments in the mandatory schemes:
Employers pay 18%, employees pay 8,5 contribution. Employees covered by the mixed system pay 1,5% contribution to the first pillar and 7% to the second pillar in 2003. (In 2004, this will be changed to 0,5%-8% respectively.)

Mandatory schemes are supplemented by the third voluntary private pension pillar, which was introduced in 1994. The number of members of the third pillar is currently around 1 million. In order to make this pillar more favoured among insured people, the government provide tax advantages:  up to a certain amount, taxation can be decreased by a maximum of 30%.

Planned measures:
The new Government of the Republic of Hungary considers the pension reform, introduced in 1998, as an epochal, long-term model. It is the Government?s strong intention to strengthen the mandatory private pillar and carry on the modification process of the public pay-as-you-go pillar, within the mandatory pension system.
Further on, the intensive strengthening of the III. pillar voluntary supplementary schemes, aiming at savings for the elderly, is also a particular priority within pension policy. The Government intends to carry on pension reform with the strong involvement of social partners.

The following steps are planned to be implemented in the private pension pillar:
-contribution will be increased to 8%, as it was originally planned in 1998,
-strengthening of guarantee elements of the private pension schemes,
-provisions concerning life-annuity service, including indexation will be supplemented and corrected,
-measures will be introduced to decrease management costs and to support the efficient management of property.

Plans to reconstruct the public pension pillar:
The old age pension system will further on remain as a service time-determined pay-as-you financed model, although it will provide most balanced benefits based on life-long earning and paid contributions. The strong connection between contributions and services needs the modernisation of the Hungarian registration system. It is the Government?s intention to provide opportunities  for appropriate entitlement of pension benefits based on atypical employment forms, i.e. on the basis  of self-employment, or care services financed by the state.

Besides strengthening the insurance principle, the Government also committed to preserve  solidarity elements of the system concerning benefits provided in case of invalidity, accident invalidity and survivorship, as well as pension benefits provided for women. Benefits provided for the elderly,having shorter service time or low-level savings won?t be supplemented by pension revenue, but by budget resources.

Plans to enhance the objective of longer working lives:
- The retirement age of 55 years is gradually increasing to 62 by 2009. In 2003 the retirement age of females is 59 years. The retirement age of 60 years for males has already been increased to 62.
Without taking into account the increase of the retirement age, the demographic dependency  ratio would currently be 42,4% (those above the age of 18 are considered as members of the  active population), while taking into consideration the current 58-year retirement age for women and  the 62-year retirement age for men, this ratio has been decreased to 35,4%, whereas considering the unified 62-year retirement age, the dependency ratio will be decreased to 30%.
This new 62-year retirement age can be evaluated as an appropriate result, taking into  consideration the current Hungarian demographic situation, as well as the fact that life expectancy of women and men reaching their retirement age is 4 years less than those of living in EU Member States.
However, it is also possible for both genders to apply for retirement, 5 years prior to the  retirement age for women and in their 60 years of age for men, given that they accumulated the  necessary contribution period. In case of having 38  years contribution period, retirement will be  provided without decreasing the amount of pension, while in case of having 31-38 years contribution period,the amount of pension will be decreased up to the maximum of 30%.

Current experiences show that many people take this opportunity, thus the actual retirement age  is 57-58 years of age. It is a particular feature among women, that they accumulate somewhat  less contribution period, whereas their pension life is longer than the average. (Comparing to men, women have an average of 9 years less contribution period, while the period being pensioners is 9 years longer.)

-Provisions laying down conditions for early retirement will be stricter from 2009, the  earliest retirement age will then be 59 for both genders, and at least 37-39 years of contribution period shall be accumulated for a decreased pension, while 40 years of contribution period is required to pension without any decrease.
Those who have at least 38 years of service time and reached the age of 62, but work at least  another consecutive year, their pension will be increased by 0,3% in each month they are insured.
Anyhow, demands to become invalidity pensioners have not been mitigated.
In each year about 130-150 persons claim invalidity pension, however, the number of calculated invalidity pensions has been changed: it used to be some 60 thousands in the early 90s, whereas it is nowadays about 48-50 thousands. This situation could be changed by rehabilitation measures.

-Old age social security could be based on the extension of employment opportunities.  The employment of disadvantages groups, inter alia women, might be enhanced by legislative modifications. One of the important measure was to introduce a benefit encouraging finding jobs. The objective of this benefit is to provide further financial support after the expiration of unemployment benefit to find jobs and to ensure co-operation. The duration of providing this benefit is 270 days for those being above 45 years of age. Another important measure of modifying Act 4 of 1991 on employment was to support atypical works. In case of persons above 45 years of age, being less capable to be adapted to the new labour market environment, the modification made it possible to provide more favourable circumstances for their employment. As a consequence of the political, economic and social transition in the early 1990s a strong age-related discrimination occurred in the labour market, therefore the employment of older persons has been more problematic. The above modification provides favourable financial conditions for training, retraining, creating jobs and employment for public usage.

-Special regional labour market programmes are implemented in order to encourage the
employment of people with multiply disadvantages.