1. Bled2007.ppt1 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 Based on a detailed study by the author and Janos Köllő to be published in Közgazdasági Szemle (Economic Review) June 2007, in Hungarian

2. Bled2007.ppt2 PLAN: 1.From full to low employment 2. Exodus into retirement 3. Pension reform 1998 4. Pension promise until 2020 5. Policy conclusions

3. Bled2007.ppt3 Cross-sectional employment ratios population aged 25-64 raw average adjusted by 1970 weights Part 1: From full to low employment Figure 1

4. Bled2007.ppt4 Straight horizontal: high school graduates ―│―│―│ Age-adjusted probability of employment males aged 25-64 percentage points difference versus high-school graduates university skilled workers primary Figure 2

5. Bled2007.ppt5 Cross-section: 1970 1990 1996-2001 Birth cohorts: red 1944 blue 1950 green 1956 Employment ratios Age-profiles and cohort paths - males with primary education Figure 3

6. Bled2007.ppt6 Straight horizontal: high school graduates ―│―│―│ Age-adjusted gross monthly wages males aged 25-64 percentage points difference versus high-school graduates university skilled workers primary Figure 4

7. Bled2007.ppt7 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 Figure 5

8. Bled2007.ppt8 Number of new retirees thousand persons Part 2: Exodus to retirement total old-age disability Figure 6

9. Bled2007.ppt9 Figure 7 Restricting pension benefits monthly old-age pensions in 2003 per years of service by year of retirement huf year of retirement

10. Bled2007.ppt10 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

11. Bled2007.ppt11 Part 4: Pension promise until 2020 year of birth Area between o―o―o and blue: disability pensioners blue and red: non-disabled, non-eligible at age 60 Baby-boom or employment? number of births versus population and eligibility at age 60 Figure 8

12. Bled2007.ppt12 Table 1 Prim. Second. Higher education TOTAL RETIRED old-age 8 5 4 6 disability 27 15 4 17 TOGETHER 35 20 8 23 CONTRIBUTOR all year 24 50 65 44 > ½ year 6 7 4 6 < ½ year 6 7 4 6 TOGETHER 36 64 73 56 NEITHER-NOR 29 16 19 21 How is this possible? cohorts 1945-1959 together in 2005 (aged 45-60) percent of respective population

13. Bled2007.ppt13 Table 2 Prim. Second. Higher education TOTAL PRESENT FORMULA all year 65 87 133 89 > ½ year 43 59 111 58 252530 < ½ year 25 25 80 30 TOGETHER 53 74 124 75 33 2013 FORMULA all year 55 72 110 74 > ½ year 33 44 85 44 TOGETHER 43 60 100 60 Expected relative entry pensions (cohorts 1945-1959 average of 2005-2020) relative: percent of overall average wage in year of retirement green: < 40 percent ILO convention

14. Bled2007.ppt14 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: Results: 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

15. Bled2007.ppt15 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 sustainability to be duly accounted for.) Round table initiated by the prime minister. 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

16. Bled2007.ppt16 THANK YOU FOR YOUR ATTENTION