The development of Hungary’s pension scheme and how it is affected by the economic crisis

Seminararbeit, 2009

25 Seiten, Note: Sehr gut


Table of contents

1. Introduction
1.1. Research question and hypotheses

2. Process of Hungarian transformation
2.1. Characteristics of the transformation
2.2. Economic background of the transformation

3. Pension reform
3.1. Pension scheme before 1998
3.2. Introduction of the new pension system 1998

4. Macroeconomic survey of Hungary’s economy
4.1. GDP
4.2. Public debt
4.3. Employment
4.4. Trust
4.5. Crisis conditioned effects

5. Prospected changes of the Hungarian pension scheme

6. Conclusions

7. Attachment
7.1. Graphics
7.2. Bibliography

1. Introduction

Most of the European countries modified or combined their current compulsory state pension systems with voluntary occupational pension scheemes. The frequency of using a second tier of pension funds accumulated in the European Union and the combination of economic growth and labor market developments laid the preconditions for differences in social spending across regions. This approach is based on the ‘logic of industrialism’ (Carnes 2007 : 870). The measures do not acutally capture the specific expenditures that mitigate the economic dislocations resulting from changes in the terms of trade.

Anyway this approach has been my starting point for the case of Hungary, because hardly any other member state of the EU went through such a grand transformation process of its state-model and sticks now into such deep economic troubles. An ensuing recession, the worst in 16 years, toppled the government. This leads to my research question.

1.1. Research question and hypotheses

I want to analyse the relationship between the new openness of the Hungarian market and its effects on the pension scheme. Hence, I engage with the research question why the funded pension scheme has been implemented in Hungary and how changes of the old-age provisions can be assessed, under the circumstances of the economic crisis.

I assume the change to the funded scheme, that has been lead by the IMF, is caused by interests in liberalising the Hungarian financial market. I further suppose that the old-age system in Hungary will hardly be financeable during the next decades.

After a necessary abstract of the economic transformation in Hungary since the beginning of the 1990’s, I will have a look at the current macroeconomic situation. Then, I will try to give a prospect of the financeability of the Hungarian pension scheme in the next decades.

I am going to use data of primary and secondary sources for my research.

2. Process of Hungarian transformation

Institutions of modern parliamentary democracy were gradually formed and strengthened. So-called ‘waves’ of democratization that have occured during the second half of the 20th century have been described. The fourth wave is “the one we have just witnessed following the collapse of the Soviet and Eastern European communist regimes” (Kornai 2006 : 214).

With the rise of neoliberalism as the main paradigm in economic policy-making, especially in developing and transitional countries, a deliberate move from the universalist-redistributive heritage to strongly differentiated, earnings-related benefits, basically contributory financed, took place. Parametric reforms seperated pension schemes from other social insurance plans and the state budget and introduced employee contributions, which are subject to automatic indexation rules.

Together with other East and Central European countries, Hungary became a capitalist country in 1990.

Noticalbe ist that the Hungarian the post-communist capitalism is not product of an ‚organic’ national development, instead of the communistic collaps, which left globalisation a free territory without resistences. Because Hungary had no national bourgeoisie, no lobby of employees, no active civil society or any relevant economic traditions.

The slow erosion of the social state and privatisings of public funktions are typical phenomenons of western europe. Hungarians communist society experienced this transformation at one fell swoop (cf. Ehrke 2004 : 2).

The historically unique at this process is, according to Ehrke (cf. ibid: 2), that this process is not caused by a military loss, but in a process of conscious self- liquiditation, which leads to the implementation of democratic and market-economical institutions.

2.1. Characteristics of the transformation

Kornai described six characteristics (cf. Kornai 2006 : 217f) of the transformation that has taken place in the Central Eastern Europe region during the past 15 years, which are quite accurate for my research of Hungary.

Characteristics number one and two are telling that changes follow the main directions of Western civilization development in the economic sphere, in the direction of the capitalist economic system, and in the political field in the direction of democracy.

The third characteristic is that there has been a complete transformation, parallel in all spheres. In the economy, in the political structure, in the world of political ideology, in the legal system and in the stratification of society.

The fourth characteristic is, that the transformation was non-violent.

The fifth tells that the process of transformation took place under peaceful circumstances and were not forced upon society as a result of foreign military occupation.

The sixth characteristic is, that the transformation took place with incredible speed, within a time frame of 10 to 15 years.

“This has not been the first ‘great transformation’ in world history, (...) But the presence of all six characteristics together is unique in world history” (Kornai 2006 : 218).

2.2. Economic background of the transformation

The question arises for us, why these reforms took place?

Chart 1 provides a comparison between the growth of Hungary as an socialist country and capitalist economies represented by 13 old EU members1 during the last four decades before the collapse.

Chart 1: Growth rates in socialist Hungary and capitalism

Abbildung in dieser Leseprobe nicht enthalten

Source: Kornai 2006

It is a fact, that the existing socialism lost the race against the existing capitalism. The table indicates the growing superiority of the capitalist economy. “The main trend of history has pointed towards the direction of the expansion of capitalism” (Kornai 2006 : 211).

According to Kornai (cf. 2006 : 224) the most significant explanation for the rapidity of the transformation are the effects of the external world surrounding the CEE countries. The expression ‘external world’ is used in its widest possible sense to refer to various outside influences and circumstances. One of the effects was the adoption of foreign examples. From the operation forms of corporte management and banking systems to political insitutions, from media programmes to advertising, from the organization of educational activities to the financing of the arts and sciences, there was hardly an area of social activity where foreign examples have not been followed. Foreign investors also exterted an extraordinary influence. Not only did they bring in capital, but, in addition to technical know-how, they brought knowledge about how to manage a company, and about what kind of legal system and behavioural norms are requirements for the opeation of a capitalist economy.

So Hungary joined important international organizations, under Western leadership, such as NATO, OECD and the WTO, and their relationships became more active with the World Bank and the IMF. The succession of various memberships culminated in their accession to the European Union (cf. Kornai 2006 : 224).

Chart 2: Growth before and after 1989, and after transformational recession

Abbildung in dieser Leseprobe nicht enthalten

Sources: UN ECE Economic Survey of Europe 2001, UN ECE Economic Survey of Europe 2005

After Hungary’s transformation it’s economy showed a rapid growth. Since 1993 the GDP has been growing and it topped the EU 15 average growth in the end of the 1990s. Though it only reached the 1989 peak in 1999 (cf. Simonovits 2002 : 3). This can be traced to the new order’s utilization of formerly hidden reserves not exploited by the previous inefficient system and to the fact that deep recessions are usually followed by rapid upswings (cf. Kornai 2006 : 213).

Another important point is, that external investments have been leading the growth, while consumption has been lagging (cf. Simonovits 2002 : 3)

Pension privatization was recommended by the IFI’s and the World Bank as part of a neoliberal reform package for the CEE and FSU states. Another driving force for these reforms have been market-oriented economists, which were policy makers themselves or had influence over them. Another think-tank have been the trade unions. They wanted to decrease the role of the state in the economy, as well as in the pension schemes. Müller (cf. 2008 : 98f) is speaking of a key role of ‘insulated policy-making elites’ in pension privatization.

As well left-wing governments can carry out market-friendly reforms, if they are under pressure from international creditors, caused by a context of high indebtedness. Generally, if the external debt of a country is high, governments tend to market- oriented reforms.

However ‘conditionality’ at the investments did exist, the practice started, according to Kornai (cf. 2006 : 225), with the Washington-based financial organizations and was gradually taken up by the European Union according to which the availability of funds for loans and grants, the expansion of existing relationships and the guaranteeing of various additional rights were increasingly tied to the satisfaction of certain preconditions. These preconditions were generally formulated in such a way as to serve the long-term interests of the individual countries concerned. Still, many changes were forced upon them through external pressures or, at the very least, these pressures contributed to the speedier implementation of changes.

This economic background points out the implementation of a funded pension system along the lines of western role-model.

A worldwide comparison shows, that the volume of money placed in pension funds quintupled between 1992 and 2007 from 4.8 Bill. to 28.5 Bill. Dollar (OECD 2007 : 6).


1 Luxembourg and West Germany were excluded from the table due to unavailability of data.

Ende der Leseprobe aus 25 Seiten


The development of Hungary’s pension scheme and how it is affected by the economic crisis
Universität Wien  (Politikwissenschaft)
SE Ageing and Pension Reform Around the World
Sehr gut
ISBN (eBook)
ISBN (Buch)
669 KB
Hungary, pension, pension scheme, economic crisis, PAYG, IMF, World Bank, pay-as-you-go, pension system
Arbeit zitieren
Mag. phil. Marcus Wohlgemuth (Autor:in), 2009, The development of Hungary’s pension scheme and how it is affected by the economic crisis, München, GRIN Verlag,


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