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Contents

INTRODUCTION

PART ONE: INTRODUCTION AND THE FOUNDATION OF THE IMPACT ANALYSIS
1. Profile and activities of the Pension and Old-Age Round Table
1.1. Some main findings made by the Report
1.2. Content and chapters of the Report
2. Constraints
2.1. Initial status: "The current pension system", point of departure for the model and uncertainties in the system in 2013
2.1.1. The current system
2.1.2. Modifications after 2006, to be applied in the model
2.1.3. Uncertainties of the situation in 2013
2.2. Management of disability pension
2.3. Forecast of the labour demand and the lack of feedback
2.4. Time scope of the impact study
2.5. Male-female discrepancies
3. Methodological bases of the impact study

PART TWO: RESULTS OF THE IMPACT ANALYSIS
4. Comparative results of the social and economic impact study conducted by the Pension and Old-Age Round Table
4.1. Criteria, options studied
4.2. Versions of pension structures studied by the Pension and Old-Age Round Table
4.3. Parameters set for the paradigms
4.4. Main findings of the study of social and economic impacts
4.4.1. Demographic bases
4.4.2. Employment bases
4.4.3. Main differences among the approaches applied by the paradigms investigated
4.4.4. Relative pensions
4.4.5. Age profile and age centre
4.4.6. Contribution levels
4.4.7. Requirements of financing by the Central Budget
4.4.8. Coverage
4.4.9. Role of pillars as the sources of pension
4.4.10. Volume of pension expenditures
4.5. Summary evaluation of the impact study

PART THREE: FURTHER ACHIEVEMENTS OF THE ROUND TABLE
5. Timely issues in maintaining records of the data required as a basis for the determination of eligibility and the amount of pension
6. The Position of the Pension and Old-Age Round Table about the main issues related to the mixed pension system and the second pillar
7. Old age affairs
8. International review
9. How to proceed: on the necessity, possible tasks and institutional model of a Pension Insurance Advisory Council and on the continuous development of the pension model

ENCLOSURES
1. Members and permanent guests of the Pension and Old-Age Round Table
2. Sessions, agendas of the Pension and Old-Age Round Table
3. The current pension system, changes effected in the recent past (2006 to 2009), year 2013
4. About the old age and disability pension schemes
5. Estimates concerning the future population and mortality of disability pensioners
6. Socio-demographic preliminary calculations to model the reconstruction of the pension system. Extrapolation system and database (László Hablicsek)
7. The micro-simulation model used for the impact study (Gyula Horváth)
8. Pension right acquisition based on the data of the entire life career. Report on the data-survey conducted by the Central Statistical Office (HCSO) and the Central Administration of National Pension Insurance (CANPI) (Mónika Bálint-János Köllő-György Molnár)
9. Foundations of a paradigmatic reform
10. General planning principles
11. Properties of the pension system used as the point of departure (NY2006) as reflected by the impact study
12. The pension point system (NYpont) (Rudolf Borlói-János Réti)
13. Point system and universal basic pension (NYp+a). A concept for the reform of the old-age pension (Mária Augusztinovics-Ágnes Matits)
14. Description of the NDC paradigm (NYndc and NDCtbki) (József Banyár-Róbert Iván Gál-József Mészáros)
15. Description of the universal basic pension (CSAKa) (Csaba Fehér)
16. The "natural pension system" (György Németh)
17. Timely issues about the records of the data required for the determination of eligibility and the amount of pension
18. Position of the Pension and Old-Age Round Table concerning the main issues related to the mixed pension system, the second pillar
19. Relationship between the policy of old-age affairs and the policy about ageing (Éva Orsós Hegyesi)
20. Pension paradigms in the OECD countries. An international overview for the Pension and Old-Age Round Table (Dániel Havran)
21. How to proceed? On the necessity, possible tasks and the institutional model of a Pension Insurance Advisory Council and on the continuous development of the pension model

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Introduction

This Report is going to present the main statements elaborated by the Pension and Old-Age Round Table between 2007 and 2009. In the focus of this work we find the methods that during the period ending in 2050 could improve the determinant properties of the Hungarian pension system (fairness, transparency, financing, coverage, adequacy and sustainability). In the coming four decades two large waves, the baby-boom generation and their children (the "echo") will retire. Given a fertility rate that is constantly low (it is currently 1.3 that should be compared with the self-reproduction rate that is somewhat in excess of 2), it does not ensure replacement of those leaving the labour market and will gradually deteriorate the demographic balance. This is coupled with the level of activity and employment in Hungary that on the European level can be deemed very low, which will turn the already unfavourable old age dependency ratios into almost unmanageable full economic dependency ratios.

The pension system all by itself is unable to remedy these circumstances, the arena is basically determined by external demographic and labour market conditions. What circumstances are needed to achieve that many of the babies unborn today should be born, and to ensure that they when grown up should be better employed on the labour market are questions that involve some line policy issues outside the scope of the pension system. Likewise, the future tendency of labour demand is an issue of economic policy on a more general level. The pension system itself may have a certain feedback to these factors but we know very little about the intensity of feedbacks (e.g. increase in the number of children), or they could hardly be quantified or modelled (e.g. labour market incentives). Therefore our Report does not discuss these aspects.

A pension system could within its own frames be changed through tuning its own parameters and logics of operation. How much and how long is withdrawn by the system from the active population and how long and on what level will - on the average and expectedly - the system refund them are fundamental issues determining many other things. Thus contribution level, retirement age, rules of pension benefit determination and the rate of pension indexation are closely interrelated. The decisiveness of demographical and employment conditions is properly illustrated by the fact that whilst for the payment of pension benefits that in the European context can be deemed as very low (HUF 80 thousand, approx. EUR 300 on the average) very high contributions, making up one third of the gross wages have to be withdrawn, the deficit continuously grew and the system would run into a record deficit by the middle of the century save for the changes of the parameters in 2009 that made the system more or less manageable.

Changes effected recently (deletion of the pension for the 13th month, restarting the increase of retirement age, modification of the indexation rules) created a virtual financial equilibrium until 2050. This equilibrium is virtual, because the persistence of the current situation for the long term is hardly imaginable. Currently in a very bad employment field, persons who are too few compared to the entire population pay high amounts of contribution; the system also contains some nontransparent, untraceable redistribution; meanwhile the number or proportion of persons precluded from the system or of those who reach old age without obtaining pension eligibility also make us concerned. As long as the system is exposed to the politics to the extent experienced today, it may happen that the lobby power of various social groups would overturn the equilibrium earlier than predicted by simple forecasts. The real benefit brought by the changes of parameters is that we may come up for a quick breath of air and thus we have some chances to think over the ideas described in the Report, hold discussions, further investigate important details, create and fine-tune models and on the basis of all that make decisions.

This was the framework within which the Round Table elaborated those different approaches that it deemed suitable for the operation of a future pension system. The social and economic impact study of five different versions, "paradigms" has been conducted. Our studies wished to draft an overall picture made up of the following properties: relative pensions, contribution burden, requirements of financing by the Central Budget, coverage, the size of the system (volume of the pension expenditures). These can help to clarify how the two basic tasks of the pension system - consumption smoothing over one’s life cycle (between active and retirement periods) and avoiding extreme old-age poverty –could be managed together or separately of each other, what priorities should be given to which task, and what is meant by the requirements of fairness and transparency in this respect.

One of the five versions would introduce the so-called point scheme into the social insurance system. Another approach would complete this with the introduction of a "zero pillar", i.e. a universal basic pension that would be payable to anybody irrespective of contribution payment (coupled with the maintenance of the contributory pension - decreased proportionally). The notional defined contribution (NDC) system is also analysed, which would install a strict automatism into the logics of the social insurance-pillar and would allow the permanent payment of those pension benefits only that are financially covered. Fourthly we investigate an option that on the long run exclusively contains a funded (second) pillar and gradually eliminates the pay-as-you-go element by implementing its NDC based reform and terminating its operation step by step. Finally we are also going to analyse the option that contains universal basic pension exclusively on the long run whilst the mandatory contributory pension elements (the first and the second pillar) cease to exist.

As a consequence of issues discussed earlier, none of the paradigms are expected to solve all our problems. A profound impact study relying on basic data in unprecedented detail, i.e. on information on several millions of contribution payers and pensioners is primarily able to clarify which paradigm would emphasise what and therefore what are the consequences. How could redistributions be made more transparent or how could their volumes be reduced; what are the characteristic priorities. We can see that in certain cases the average level of relative pensions would not be changed but their distribution would considerably be modified. We may experience that a permanently deficit- free pension system can exist, but the price we need to pay for it is a lower and more fluctuating pension level and/or a longer service period. Wages could be burdened to a much lesser extent, but in order to do so the help of the current taxpayers or - if the gap would be covered by indebtedness - the help of the future generations is needed; or the pensions paid by the mandatory systems should be devaluated and much more should be left to the voluntary pension savings of citizens.

This Report is not a preparation for decision-making in the meaning that a prescription that could be followed by drafting legislation only. The Round Table completed a preparatory phase that explains the aspects to be considered when values are selected. The next step should be taken by decision makers: what could and what could not be considered as an option, and in respect of such options what details should be investigated in more depth and detail. Obviously, each paradigm could be simulated with other parameters, which would result in some other scenarios within the frames set by the properties of the given version. A given paradigm, whilst its unique properties e.g. its distribution features remain untouched, could be operated with different contribution rates, demands for finances by the Central Budget, or pension level which in the meantime cannot be varied independently of each other. Such sensitivity investigations, scenario analyses could be performed in the next phase of this work.

We deem it important that the work started should not be stopped here. To this end the frames of the Round Table need to be transgressed and an institutional framework should be created that can correspond best to the pension technical and pension policy work as well as the continuous development needs of the model serving as the tool for impact studies. In this spirit our Report outlines a concept for the urgent establishment of an institutional framework in order that from the basis already achieved further steps could be taken. Though we have gained some time, but it is not endless.

It should be emphasised that the content of our Report cannot be considered as a forecast. Our work has had to be performed under serious constraints including but not limited to the absence of feedback between the pension system and the labour market, mentioned earlier. At several points where the actual version of the model does not manage certain issues, our Report is supplemented by verbal contemplations.

The work of the Round Table focused on old-age pension and discussed the issue of disability pension (and dependents’ risks) inasmuch as it was necessary for separating it from the analysis of the old-age pension. Meanwhile the Round Table passed specific resolutions concerning certain issues of old-age and disability pensions.

Questions concerning the maintenance of the mixed system, the funded pillar are not drawn in the centre of the Report. The experts of the Round Table do not agree on the advantages and disadvantages of the mixed system - perhaps this is the topic from among all topics where opinions diverge most. It is consented that the second pillar itself does not cure the deficiencies or problems of the system, i.e. its demographical and employment embedment. It was also consented that the effectiveness, efficiency of the operation should be improved and the real advantage of the funded pillar namely the international distribution of risks, which may diminish one-sided exposure to domestic economic and social processes, a feature unavailable in the first pillar, should be better utilised. The Round Table passed a specific resolution on this topic. There is but one among the versions subjected to our impact study, which gives higher priority to the conversion into a funded system.

We do not discuss in detail questions about voluntary pension savings. No doubt, this is a very important topic and on the basis of the impact study it seems obvious that it should be given a bigger role in the future if we wish to target an adequately scoped pension replacement without making more debts and/or collecting high contributions/taxes. Some of the paradigms investigated would move a large part of the resources of the old-age incomes here. In the last twenty years in Hungary the emergence of a uniform approach concerning the set of tools of self-care was not experienced; the regulations, the tax environment were subjected to ad hoc changes almost every year incalculably, without any sign of stability. It is recommended that decision makers should in consideration of also this Report elaborate a clear picture about the strategic role that pension savings outside the mandatory system should play in the future. Then the institutional system, the tools, the scheme of rebates should be accordingly adjusted, and all these should be presented in a clear and transparent manner and left constantly unchanged. Otherwise our pension system would be moved to a more difficult situation even on the medium term.

Records are the basis of whatever pension reform. This is another important statement made by the Round Table, which seems to be of technical nature although it is substantial. A basic condition of the closer and more transparent relationship between contributions paid in the active period of earning and pensions is the continuous, transparent, durable and credible registration of contribution payments and acquisition of eligibilities. In our work we had to learn that the impeccable harmony among the public administration agencies concerning all details of the above is missing. Therefore, although this is far from being a central element of the work of the Round Table, at this point we should raise attention to the rethinking of this issue from a strategic aspect, and the adequate determination of processes, competences and data flows.

Finally we highlight that the Pension and Old-Age Round Table dedicated a disproportionately large part of its time and energies to pension affairs and much less of it to the old-age affairs. This is also understandable because pension itself will be a topic of outstanding strategic, social and economic importance in Hungary in the coming decades. However it cannot be evaded that should we consider the growing number of ageing or old people as a "burden" instead of elaborating an approach where they could be beneficial for the entire society, we greatly aggravate for ourselves the solution of pension issues even in their narrower meaning. In the absence of an intellectually and physically healthy, active old generation, we must encounter much more severe challenges than those discussed by our Report. At this point we strived to utilise the elements of the preparatory work regarding the National Strategy of Old-Age Affairs approved recently.

I would like to express my thanks to the members, experts, and also to the invited guests of the Round Table, who made their time and energy available for us for two and half years, and besides their usual engagements, at the expenses of their free time participated in this unprecedented work. I would like to thank the representatives of the Hungarian public administration for their help, who via their participation in the sessions and the working groups, delivery of indispensable data, reconciliation of important issues and participation in certain research projects gave a fundamental impetus to the work of the Round Table. I wish to thank the Office of the Prime Minister and its staff who created the background for the operation of the Round Table. Thanks should be expressed for the work performed by Deloitte Zrt. providing indispensable help in the modelling phase of the impact study.

I would like to mention with appreciation the name of Júlia Király, the first chair of the Round Table (until summer 2007), currently the deputy governor of the National Bank of Hungary (NBH), for starting the operation of the Round Table. Equally I wish to thank Szabolcs Végh, the technical secretary of the Round Table (until May 2009), currently line state secretary of the Ministry of Finance (MoF), for greatly assisting my work, the compilation and arrangement of the sessions, and in general the operation of the Round Table. Special thanks should be expressed to Mária Augusztinovics, Erzsébet Kovács and Ágnes Matits, who took a lion’s share in the preparation of the impact study, its implementation and evaluation, and finally they provided significant help in the compilation and completion of the Report.

Lastly I would like to recall with reverence our member László Antal who deceased last year, and our permanent expert István Hetényi who also deceased last year. Both of them enriched our work with their wisdom and experiences.

Budapest, November 2009
Péter Holtzer

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