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Decreased Employment and Pensions – The Case of Hungary Maria Augusztinovics

International Forum on Pension Reform: Exploring the Link to Labor and Financial Market Reforms Bled, 7-9 June 2007. Decreased Employment and Pensions – The Case of Hungary Maria Augusztinovics auguszti@t-online.hu.

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Decreased Employment and Pensions – The Case of Hungary Maria Augusztinovics

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  1. International Forum on Pension Reform: Exploring the Link to Labor and Financial Market ReformsBled, 7-9 June 2007 Decreased Employment and Pensions – The Case of Hungary Maria Augusztinovics auguszti@t-online.hu Based on a detailed study by the author and Janos Köllőto be published in Közgazdasági Szemle (Economic Review)June 2007, in Hungarian Bled2007.ppt

  2. PLAN: • From full to low employment • 2. Exodus into retirement • 3. Pension reform 1998 • 4. Pension promise until 2020 • 5. Policy conclusions Bled2007.ppt

  3. Part 1: From full to low employment Figure 1 Cross-sectional employment ratios population aged 25-64 raw average adjusted by1970 weights Bled2007.ppt

  4. Figure 2 Age-adjusted probability of employmentmales aged 25-64 percentage points difference versus high-school graduates university skilled workers primary Straight horizontal: high school graduates ―│―│―│ Bled2007.ppt

  5. Figure 3 Employment ratios Age-profiles and cohort paths - males with primary education Cross-section: 1970 1990 1996-2001 Birth cohorts: red 1944 blue 1950 green 1956 Bled2007.ppt

  6. Figure 4 Age-adjusted gross monthly wagesmales aged 25-64 percentage points difference versus high-school graduates university skilled workers primary Straight horizontal: high school graduates ―│―│―│ Bled2007.ppt

  7. Figure 5 Relative wages (wage at age 30 = 100) Age-profiles and cohort paths - males with higher education Cross-section: 1989 1996 2001 Birth cohorts: dark 1938 red 1944 blue 1950 green 1956 Bled2007.ppt

  8. Part 2: Exodus to retirement Number of new retirees thousand persons Figure 6 total old-age disability Bled2007.ppt

  9. Figure 7 Restricting pension benefits monthly old-age pensions in 2003 per years of service by year of retirement huf year of retirement Bled2007.ppt

  10. Part 3: Pension reform 1998 Focus: partial privatization (25 percent) two major errors - no age-limit for joining the mixed system - provision of annuities unregulated Public scheme remains earnings-related basic formula: accrual factor x years of service x earnings 20 years of service threshold for eligibility Redistributive components to be phased out until 2013: - non-linear scale of accrual factors (80 % for 40 years, 53 % for 20) from 2013 1.65 % for each year (66 % for 40 years) - in some special cases 15 years of service qualify until 2009 - minimum pension guarantee out by 2009 - degressive calculation of earnings out by 2013 „Pervert” redistribution sustained: 19.9 years of contribution lost because of threshold Bled2007.ppt

  11. Part 4: Pension promise until 2020 Figure 8 Baby-boom or employment? number of births versus population and eligibility at age 60 year of birth Area between o―o―o and blue: disability pensioners blue and red: non-disabled, non-eligible at age 60 Bled2007.ppt

  12. Table 1 How is this possible? cohorts 1945-1959 together in 2005 (aged 45-60) percent of respective population Prim. Second. Higher education TOTAL RETIRED old-age 8 5 4 6 disability 27 15 4 17 TOGETHER 35 20 8 23CONTRIBUTOR all year 24 50 65 44> ½ year6 7 4 6< ½ year 6 7 4 6 TOGETHER 36 64 73 56NEITHER-NOR 29 16 19 21 Bled2007.ppt

  13. Table 2 Expected relative entry pensions (cohorts 1945-1959 average of 2005-2020) Prim. Second. Higher education TOTAL PRESENT FORMULAall year 65 87 133 89 > ½ year 43 59 111 58 < ½ year 2525 8030TOGETHER 53 74 124 75 2013 FORMULAall year 55 72 110 74> ½ year33 44 85 44 TOGETHER4360 100 60 relative: percent of overall average wage in year of retirement green: < 40 percent ILO convention Bled2007.ppt

  14. Results: Rough, very cautios estimates, allowing for mobility along the life-path (in and out from employment), based – in lack of longitudinal data – on brave assumptions: 10-20 percent, altogether about 250-500 thousand people without disabitlity or old-age pension at pensionable age over the coming one and half decade. Those with entry pensions less than half of the average wage more than another 10 percent, about 250-300 thousand people Mass poverty (20-30 percent) in old age looming ahead Bled2007.ppt

  15. Part 5: Policy conclusions The Hungarian pension system requires a new reform to solve the basic problem of Income security in old age. (Aging and financial sustainabilityto be duly accounted for.) Options: 1. Re-install redistributive, „solidarity” components 2. Leave poverty to „safety net”, on means-tested basis 3. Resort to flat-sum basic pension, leave income-replacement to voluntary saving 4. Split mandatory unique public scheme in two: - flat-sum basic pension plus - earnings-related insurance Round table initiated by the prime minister. Bled2007.ppt

  16. THANK YOU FOR YOUR ATTENTION Bled2007.ppt

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