Hungary’s pension system consists of a first-pillar, earnings-related pay-as-you-go (PAYG) benefit and a privately managed second-pillar individual account. However, in 2010 the Hungarian parliament passed a series of laws that have significantly affected the second-pillar system.
On October 25, 2010 Hungary’s parliament passed a law that temporarily suspends employee contributions to second-pillar individual accounts and reallocates them to the PAYG program. Therefore, between November 1, 2010 and the end of 2011, employees will contribute 9.5% of covered monthly earnings to the PAYG program only (previously, 1.5% went to the PAYG program and 8% to individual accounts). Employers will continue to contribute 24% to the PAYG program only. The law was passed in order to help Hungary meet the deficit targets set by the European Union ( 3.8% of gross domestic product in 2010 and 3% in 2011). The government expects the law to increase government revenues by approximately 420 billion forints (approximately US$2 billion) over the next 14 months.
In addition, another bill passed by the Hungarian parliament makes participation in the second pillar voluntary for new entrants to the labor force and allows existing members to opt out of the second pillar and transfer their account balances to the first-pillar PAYG program. The opt-out period will last through the end of 2011. Workers who choose to remain in the second pillar will continue to have their funds managed by their current pension fund management company.
Despite these measures, the majority of account holders chose to remain in the second pillar after the October laws were enacted.
Thus, on December 13, 2010, the Hungarian parliament passed a new law that automatically moves workers out of the second pillar of privately managed individual accounts and transfers their account balances to the first-pillar public pension program. Workers could have chosen to remain in the second pillar by declaring so in person at a pension administration office before January 31, 2010. However, workers who opted for individual accounts are no longer eligible to receive a public pension at retirement, even though they are required to continue to contribute to the first pillar.
As a consequence of the new law, only around 100,000 out of the 3 million workers with individual accounts, chose to remain in the second pillar. As a result, analysts estimate that the number of pension fund management companies could decrease from 18 to between 4 and 8. According to the government, transferring most of the 3 trillion forint (approximately US$ 14.6 billion) of second-pillar assets under management will help reduce Hungary’s state budget deficit from 3.8% of gross domestic product in 2010 to less than 3% in 2011.
Article with courtesy of Social Security Online
Sources:Social Security Programs Throughout the World: Europe, 2010; "Hungary Passes Bill to Withhold Pension Fund Payments," Dow Jones Business News, October 6, 2010; "Hungary Bill to Allow Private Pension Fund Members to Return to State," Down Jones Newswires, October 24, 2010; "Hungary Lawmakers Pass Suspension of Private Pension Transfers," Global Pensions, October 26, 2010; "Parliament Approves Suspension of Transfers to Private Pension Funds, Ends Mandatory Membership," MTI – EcoNews, October 26, 2010; "Hungary," International Update, November 2010, US Social Security Administration; "Defying Markets, Hungary Readies Pension Rollback," Reuters, December 13, 2010; "Hungary: Death by 1000 Cuts," IPE.com, January 4, 2011; "Hungary Met 2010 Budget Deficit Goal, Needs Debt Cap, Premier Orban Says," Bloomberg, January 6, 2011; "Pension Funds Keep Only 102,019 Members," realdeal.hu, February 2, 2011; "Vast Majority of Hungary's Second-Pillar Members Return to State System," IPE.com, February 3, 2011.