Nationalization of Private Pension Funds

Summary

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Prime Minister Orbán announces temporary diversion of mandatory private pension-fund payments.

On October 13, 2010, the Orbán government announced that it would divert the 8-percent-of-gross-wage private pension-fund contribution of employees in Hungary to the state for a period of 14 months beginning in November of that year. The declared objective of this temporary diversion of mandatory private pension-fund contributions to the state was to help the Orbán government reduce the central budget deficit to the 3-percent-of-GDP necessary to gain Hungary’s removal from the European Union’s Excessive Deficit Procedure.  

On December 13, 2010, National Assembly representatives from the FideszChristian Democratic People’s Party governing alliance passed the Pension Reform and Debt Reduction Fund Law that permanently transferred mandatory private pension-fund contributions to the state unless employees indicated by January 31, 2011 that they wished to continue making payments to the funds. 

According to the legislation, employees who indicated their wish to continue making the mandatory contribution to private pension funds would no longer accumulate the employment years necessary to receive state pensions and would forfeit access to future monthly employer contributions to the state pension-fund. The Pension Reform and Debt Reduction Fund Law stipulated, moreover, that the money accrued in the mandatory private pension funds of employees who did not indicate that they wished to continue making the mandatory contribution to such funds would be diverted to a newly established Government Debt Management Center fund that would be used to reduce Hungary’s state debt (source in Hungarian, including Prime Minister Orbán’s video explanation of the legislation).   

About 3 percent of employees in Hungary indicated by the specified deadline that they wished to remain in the private pension-fund system. The nearly 3 trillion forints that the remaining 97 percent of employees in the country had accrued in mandatory private pension funds since their introduction in 1998 was diverted to the State Debt Management Center fund in June 2011.  

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Hungary’s Pension System from 1998 to 2010 

Under the system established during the final year of the Hungarian Socialist Party-led government of Prime Minister Gyula Horn in 1998, pensions in Hungary were composed of three elements paid monthly as a percentage of gross wages: an employer contribution to the state pension fund; a mandatory employee contribution to a private pension-fund; and a so-called “solidarity” employee contribution to the state pension-fund. 

When Prime Minister Viktor Orbán returned to power in 2010, the employer contribution to the state pension-fund was 24 percent of gross monthly wages, the mandatory employee contribution to a private pension fund was 8 percent of gross monthly wages and the “solidarity” employee contribution to the state  pension-fund was 1.5 percent of gross monthly wages (see table 4 in Hungarian) Under this dual system, contributions to the state were to provide 70 percent of pensions and contributions to private funds the remaining 30 percent (source in English). 

Temporary State Appropriation of Mandatory Private Pension-Fund Contributions 

On October 13, 2010, Prime Minister Orbán announced that the state would retain the 30 billion forints in mandatory monthly payments to 18 private pension funds in Hungary for a period of 14 months beginning on November 1. The prime minister said that the government would submit a bill later in the year stipulating the conditions for “returning to the state pension-system.” Both Orbán and National Economy Minister György Matolcsy said that the temporary diversion of mandatory private pension-fund contributions to the state was necessary to ensure that the government would meet its 2010 deficit target of 3.8 percent of GDP and 2011 deficit target of 3 percent of GDP, that required to gain Hungary’s removal from the European Union’s Excessive Deficit Procedure (source A and B in Hungarian).  

Nationalization of Private Pension-Fund Savings 

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National Economy Minister announces the private vs. state pension option on November 24, 2010.

On November 24, 2010, National Economy Minister György Matolcsy announced that the government would submit a bill to the National Assembly stipulating that those with money in mandatory private pension funds would have until January 31, 2011 to indicate that they wished to retain these retirement savings, otherwise they would be transferred automatically to a Hungarian Debt Management Center fund that would be used to reduce Hungary’s state debt. 

According to the bill, those who elected to keep their mandatory private pension-fund savings would no longer accumulate the employment time needed to reach the 20 work years required to receive a full state pension and the 15 work years required to receive a partial state pension; moreover, they would forfeit access to the monthly 24-percent-of-gross-wage employer contributions to the state pension-fund. Matolcsy said that under the new pension system specified in the bill, in addition to the 24-percent employer contributions to the state pension-fund, employees would have the choice of paying 10 percent of their gross monthly wages to either their retained private pension funds or to the state pension-fund, but not to both. The bill stipulated that the government would pay the real yields on private pension funds to those who surrendered their retirement savings in the funds and would compensate those who elected to retain the private pension funds for the 14-month suspension of payments to the funds announced on October 13 (source in Hungarian).  

Prime Minister Orbán, National Economy Minister Matolcsy and other government officials referred to employees who relinquished their private pension-fund savings as those who had chosen to “return to the state pension system.” (source A, B and C in Hungarian)       

On December 13, 2010, National Assembly representatives from the Fidesz-Christian Democratic People’s Party governing alliance approved the government-sponsored legislation compelling employees in Hungary to retain either their private pension-fund savings or their eligibility for state pensions. National Assembly representatives from democratic opposition parties voted against the so-called Pension Reform and Debt Reduction Fund Law, while those from the radical-nationalist Jobbik party abstained (source in Hungarian). 

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Government Pension Defense Commissioner Gabriella Selmeczi acclaims the restructuring of Hungary’s pension system.

A total of 102,458 employees indicated that they wished to retain their accumulated mandatory private pension-fund savings by the January 31, 2011 deadline. This number represented about 3.2 percent of the slightly over 3 million employees in Hungary who had made contributions to mandatory private pensions. Government Pension Defense Commissioner Gabriella Selmeczi said that “It is a huge success that 96.8 percent of private pension-fund members have chosen the state pension  system as part of the pension-defense program” (source in Hungarian). 

Hungary’s 18 private pension funds transferred 2.95 trillion forints in savings that the nearly 3 million employees who had elected to maintain their eligibility for state pensions had accumulated since 1998 to the State Debt Management Center by the June 12, 2011 deadline (source in Hungarian). 

Use of Nationalized Private Pension Fund Savings to Reduce State Debt 

On March 2, 2011, National Economy Minister György Matolcsy announced that the government would use 63 percent of the revenue from private pension-fund savings ceded to the government to reduce Hungary’s state debt to 76–77 percent of GDP (source in Hungarian). Prime Minister Viktor Orbán announced on June 21 that the government had used 1.35 trillion forints in private pension-fund savings relinquished to the government to pay down Hungary’s state debt (see The Orbán Government and Public Debt). 

Real Yields

On July 22, 2011, government Pension Defense Commissioner Selmeczi announced that 2.45 million of the 3.02 million employees who had relinquished their private pension funds to the state would receive average real yields of slightly over 76,000 forints on these funds. Selmeczi said that the fact that 570,000 former mandatory private pension-fund holders would receive no real yield served to justify the Orbán government’s restructuring of Hungary’s pension system  (source in Hungarian). 

Last updated: June 11, 2016.

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