Fidesz plans for a new system of pensions in Hungary

I’m sure Viktor Orbán is not happy today with two of his close associates: Zsolt Semjén, chairman of the Christian Democratic People’s Party, and Mihály Varga, his economic expert and former (and perhaps future) minister of finance. Both of them spilled the beans about the inner workings of Fidesz, and Varga revealed some controversial Fidesz plans for the future.

Zsolt Semjén has been just a bit too talkative recently, and in the latest of a whole series of interviews he mentioned, this time to Magyar Narancs, that his and Tibor Navracsics’s task was “amortizing” Ferenc Gyurcsány. The word comes from Vulgar Latin “admortire, to kill,” or more kindly put, to ruin him because he was a real threat to Viktor Orbán. He and Navracsics fought as “gladiators” to make sure that Gyurcsány wouldn’t be able “to touch” Orbán. Semjén might exaggerate his own role in this gladiatorial fight, but now at least one has heard from someone on the inside that the strategic aim of the two parties, for the sake of Viktor Orbán, was the removal of Gyurcsány from politics. After he was gone Orbán felt safe and ready to become prime minister again.

Semjén’s revelations are new only in the sense that the parties on the right never previously admitted what everyone else knew. What Mihály Varga said in another interview about Fidesz’s plans for the reform of the pension plan is much more serious and might be more damaging to the party’s chances next spring. Varga told Figyelő (Observer) yesterday that he and other economic experts at Fidesz are seriously thinking of introducing the Swedish model that is, according to people who have studied it, “a just but not exactly humanitarian” system.

The Swedish pension system, which has a total contribution rate of 18.5%, has two components. The first and major component is a pay-as-you-go Notional Defined Contribution (NDC) plan which receives 16% of a person’s taxable income. The second component is an individual account, the Premium Pension, which receives the remaining 2.5%. Benefits are aligned with lifetime contributions; the account balance grows with annual contributions and the rate of return on the account. At retirement, the account balance is converted to an annuity that automatically ties benefits to changes in life expectancy. In addition, the system has a balancing mechanism that adjusts NDC benefits if the plan’s financial position deteriorates. (See Annika Sundén’s study “The Swedish Pension System and the Economic Crisis.”)

According to Hungarian calculations the introduction of the Swedish model would end up being a 10-20% reduction in benefits and it might result in certain cases in the postponement of retirement until the age of 70. However, the advantage of the system for the national economy is that it would be self-sustaining. It wouldn’t need hundreds of billions of forints every year to keep the system going.

This is most likely not the first time that Fidesz economists have toyed with the idea because in 2001 they took the first steps toward more transparency in a system not known for its clarity. Unfortunately, Csaba László, finance minister of the Medgyessy government, stopped the project. Although divulging the “receipts” of payments into the pension fund was not the reform of the system that Orbán promised but didn’t deliver, according to Varga “this was the first element of a concept that [the Orbán government] worked out in 2001 and has not abandoned to this day.”

Thus the journalist who conducted the interview with Varga concluded that Fidesz still wants to implement the Orbán government’s initial plans. In fact, during the interview Varga was quite explicit when he said that “Fidesz’s opinion is that pensions must be adjusted to the state of the economy and they should be paid out of the amount [the people] put aside for this purpose.”

Would such a system be viable in Hungary?  On the plus side pensions would no longer be a drain on the national budget. Moreover, it might encourage more honest disclosure of present income in the hope of receiving greater benefits later. Transparency might also be a welcome change.

In the minus column: benefits most likely would be smaller. Considering that the average pension was 330 euros a month in 2007, less than the European Union average, a further reduction in benefits would cause considerable political and social tensions.

But now is not the time to debate the pros and cons of such a pension system. The point is that to announce a controversial new system before the elections is very dangerous, if not suicidal.  Today’s Népszava‘s front page is telling.

Fajni fog

And the caption reads “If Orbán’s party introduces the new pension plan it is unlikely that the pensioners will smile like they did ten years ago.”

Today Mihály Varga was in damage control mode and said that his comments to Figyelő had been misinterpreted. As one of the vice presidents of Fidesz, Varga is in Siófok at the moment to work on Fidesz’s campaign strategy. Somehow I don’t think that Viktor Orbán could be thrilled with his statements about the Swedish model and Fidesz’s plans. And we know what can happen in Fidesz if someone makes a mistake. Orbán’s original choice for finance minister in 1998 was László Urbán, but when Urbán said that a campaign promise was not the same as the actual government program he was dropped. So Varga ought to be careful. As for Semjén, I don’t know whether he was invited to the Fidesz pow-wow or not, but I’m sure that Orbán is annoyed with him. After all, he made it public that Gyurcsány had to be destroyed because Orbán was afraid of him. And Orbán is a very vain man.

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“his and Tibor Navracsics’s task was “amortizing” Ferenc Gyurcsány” I don’t agree with Gyurcsány’s politics. I think his ideas are based on a fairly weak set of values and reflect a poor knowledge of political history, social psychology, and a simplistic, naive, interpretation of economics. Nonetheless, I think his real problems were partially self-inflicted: his role as both Prime Minister of the coalition, and Leader of the MSZP, reflected an isolation from any trusted comrades. In a sense, he was like an officer in the First World War who led by charging at enemy trenches on a white horse. His troops, meanwhile, were barely capable or willing to engage in independent rational thought if it didn’t reflect their own self-interest, and lurked far behind. And mainly, they didn’t really help, or hinder, their cavalier general. He is certainly not a coward, but led a party largely composed of the ignoble and incapable, geared towards populist political fast-food and charlatanism. He would have been their best hope, had there been enough of them able to stand up to him, to tell him when was in the wrong despite his moneyed status. Hungarian politics follows the money, whether Fidesz or MSZP. But… Read more »

I think changing the system is not a big issue here. Both parties of cons and pros must know the advantages and disadvantages for the old and the upcoming system they are telling about. Whatever be the result, then at least give thanks that you are still receiving pension while other people from other place are not.

Pension Transfers

This is really disturbing. I just hope that it will all be worth it and that the new system will give a better pension for the retirees.

Pension Service

Very informative and comprehensive ideas !!
i was bother to the Fidesz plans for a new system of pensions in Hungary
Thanks for sharing !

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I think it is very worth in the new system of the pensions But now is not the time to debate the pros and cons of such a pension system. The point is that to announce a controversial new system before the elections is very dangerous, if not suicidal.
Thanks for sharing 🙂

Odin's Lost eye

The problem is that most government pension schemes in the world are really Ponzi schemes where the dividends paid to share holders are paid out of the investments of new investors! That is that the contributions made the un-retired are paid out to those receiving pensions now. These schemes are un-funded. Margaret Thatcher tried to break this log-jam by allowing people to ‘opt out’ from the state system but was thwarted at every turn by the Establishment who will always find 10,000 reasons why something cannot be done.
If you or I formed a similar scheme we would get put in ‘Strong Lodgings’ for a very long time!.

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Fidesz new plan will be a great fail, Where the hell he thinking ? Taxes are not enough to finance this greedy project.