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Abstract
Argentina and Hungary have recently reversed the pension reforms of the 1990s that had instituted a mandatory private pillar and transferred savings under management by private pension funds back to the public sector. It is argued here that these latest reforms were a product of political dynamics that allowed the governments of Cristina Kirchner in Argentina and Viktor Orban in Hungary to enjoy legislative support and no significant popular backlash as the incumbents blamed the capitalisation system for failures in coverage, poor performance, and high administrative costs. Yet institutional considerations alone do not explain the type of pension reform enacted nor its timing. The need felt to finance short-term debt obligations and promote deficit reduction in a context of significantly restricted access to international credit was crucial in both countries. The two cases reveal that despite being the quintessential intertemporal political bargain, pension reform can be paradoxically determined by short-term fiscal considerations. The reversal of reforms originally aimed at relieving long-term budgetary pressures fuels concerns about the sustainability of the public pension system in indebted economies once again.
Acknowledgements
The authors are grateful to Laszlo Bruszt, Balázs Vedres, and Adam Fagan for their comments and insight.
Notes
Slovenia has not yet instituted a pension privatisation reform, and the Czechs will launch their pension reform privatisation in 2013 (OECD Citation2012b).
By the beginning of 2012, the European Court of Human Rights in Strasbourg had received nearly 8000 individual applications from Hungarian nationals who felt abused by the state because of the pension reform reversal. There has not been a ruling yet as the court is currently trying to decide how to handle these claims (EurActive, January 16, 2012).
Half of them were early retirees who would have otherwise become unemployed due to the economic transformation crisis that hit Eastern Europe after 1989 (Heti Vilag Gazdasag, May 4, 1996).
Private pension fund clients receive benefits from two sources upon retirement. The state would cover 75% of their allowance and the private pension funds would pay at least the remaining 25% or more, if their performance allows for more.
It was calculated that 10–12% of the country's sovereign debt rate (which was 79.6% of GDP in mid-2010) were directly due to the lost pension revenues that was compensated through newer and larger credits since 1998 (Heti Vilag Gazdasag (Weekly World Economy), June 2, 2010).
To safeguard the value of people's pension savings various regulations curtailed the magnitude of investing in (risky, but high-yielding) stocks and foreign securities in the portfolio of the funds from the beginning. However, some of these regulations were later dismantled to provide the funds with more room for manoeuvring and to increase the competition between them in order to encourage higher profitability. For example, new regulations in 2007 allowed the funds to carry more foreign stock, but the funds immediately burnt themselves with stock investments as the stock market plummeted in 2008. Luckily, by 2009–2010, the newly thriving stock market helped them regain all their losses. However, low-yielding and low-risk government bonds dominated the funds' portfolios between 1998 and 2010, though in a decreasing way. In fact, between 1998 and 2005, 75% of the funds' assets were in government bonds on average, while stocks represented only 10% of less. From 2007, the rate of bonds decreased, to 49% by 2010. (Heti Vilag Gazdasag (Weekly World Economy), November 26, 2010).
With the exception of Poland (which carried a 54.8% of sovereign debt rate in 2010), all the new eastern member states of the EU had public debt figures around or less than 40% in 2010.
If an EU member state reports larger deficits than allowed, the European Commission starts an Excessive Deficit Procedure. This procedure usually entails a stronger EU surveillance in the form of suggested corrective macro-financial steps to be undertaken. Irresponsible member states can face financial sanctions after years of warnings, and their EU subsidies can be suspended until they demonstrate enough efforts to meet the required deficit figures. Hungary has been under the Excessive Deficit Procedure since its EU accession in 2004 for missing the mandated deficit targets every year.
European Council Presidency Conclusion of 23 March 2005, page 30.
While Hungary could record private pension fund contributions as a public income, the government's deficit-to-GDP ratio decreased by 1.1% points in 2005, 0.93% points in 2006, 0.47% points in 2007, 0.67% points in 2008, and 0.25% points in 2009 (Heti Vilag Gazdasag, November 26, 2010).
The de facto abolition of the fully funded mandatory defined contribution scheme in Hungary was carried out in three steps. First, in late November 2010, the government diverted 14 months (November 2010–December 2011) of private pension fund contributions to the public fund. A few weeks later (December 13, 2010), a new law was adopted that forced private fund contributors back to the public plan otherwise they were to be deprived of public pensions (e.g. 75% of their pension benefit) from 2011. Unsurprisingly, 97% of the 3.1 million private fund contributors left the funded scheme. Third, in March 2012, the government extended the diversion of private fund contributions indefinitely, leaving the funds with no mandatory contributions (income), thus turning them into voluntary pension saving accounts. As a result of this ultimatum, a quarter of the remaining private fund contributors switched back to the public scheme (Heti Vilag Gazdasag (Weekly World Economy), April 3, 2012).
In the case of Argentina, hidden liabilities also refer to provincial pension systems that were absorbed by the federal government in 1995 (Perry and Serven Citation2002).
In 2001, contribution rates were cut in an effort to heat up the economy that had been plagued by a three-year recession, which would only end in 2002.
However, the deal did not change negative perceptions of Argentina in the market. The country risk for Argentina a few days later continued to follow a downward spiral (Machinea Citation2002, p. 66).
Most of those who switched back to the public system were women over 40, whose life expectancy is higher and income lower than men's on average.
The average annual return needs to be considered in light of relatively high inflation (in international comparison), and the fact that the performance of the Argentine pension funds was based on the face value of bonds rather than their market value which could be lower.
A lingering consequence of the default of 2001 has been the threat of international litigation against Argentina by those bondholders who did not join the debt restructurings of 2005 or 2010 and hoped instead to profit from a verdict in their favour in foreign courts. If Argentina issues international bonds, those holdout bondholders – as they are called – would be the first to have access to the revenue from the new issuance. It is because of this threat – rather than more ephemeral considerations about reputation – that Argentina has not issued bonds under international law since 2001.
