Friday, April 10, 2009
Hungary's Pension Bomb
"It's a story that goes to the heart of the country's economic mess. Hungary, a nation of 10 million, has three million pensioners. ... The average Hungarian retires at 58, and just 14% of Hungarians between 60 and 64 are working, compared with more than half of Americans.. ... Hungary has run fiscal deficits for years to pay for social programs, and its annual tab for pension now surpasses 10% of its gross domestic product. The government had sold bonds to finance these outlays. In October, investors stopped buying them. ... Hungary poses the global financial crisis's biggest challenge yet to the European Union, which is fiercely debating how, or whether, to attempt a rescue. ... Pensions weigh heavily on Hugary's public finances. Employers and employees in the country's work force of roughly four million pay into the state pension program. ... Members of Prime Minister Gyurcsany's Socialist party have been protective of pensioners, wary that cuts could fall hard on older Hungarians who form a key Socialist voting bloc. ... The system, many say, gives Hugarians an incentive to retire young or leave the work force for relatively minor ailments. ... A stab at reform in 1997 shifted the country toward private pensions, but politicians eager for votes subsequently larded the public system back up--the biggest hunk of pork being the 13th month, introduced in 2003 by Mr. Gyurcsany's predecessror. ... Critics say the problems with Hungary's pension system are manifold. ... [Les] Nementhy, who runs a small investment-banking firm in Budapest, says his firm has to spend just over one million forints a month in income and payroll taxes so that an employee can have 395,000 forints in take-home pay. This 'tax wedge'--the difference betwen what the employer pays and what the employee takes home--is the second-highest in the OECD, behind Belgium. ... Gyurcsany had proposed some changes. He preached austerity starting in 2006, after he was caught in tape admitting that the government lied to camouflage how bad the fiscal situation was ahead of elections. He has since propsed cutting the 13th-month bonus, but for existing retirees would spread the money out over the other 12. He proposed raising the retirement age to 65, but not until 2050", Charles Forelle at the WSJ, 25 March 2009.
Who wants to hold a forint savings account or bond? The government lied. Amazing. Was this the only time in Hungary's history? Zimbabwe Ben, do you duty. Bail Hungary out! In 1971 Richard Nixon saved Social Security for all time to come. What separates the US from Hungary is that the US dollar is the world's reserve currency. For now.