BUDAPEST, Hungary - A special task force formed earlier this summer to overhaul Hungary's ailing state pension system has started to fill in the details of its reorganization plan.
Members of the working group - made up of various government officials, World Bank analysts and outside experts - aim to finish drafting a bill on restructuring the system by the end of August. They hope the bill will be enacted later this year and be implemented in January 1998.
Hungarian officials decided to adopt a three-tier system, where a portion of the state social security payroll tax is diverted into newly created defined contribution plans. Voluntary mutual benefit funds, a form of long-term savings vehicles, are the third option.
So far, the working group has decided to recommend the retirement payroll tax fall to 28% of an employee's salary from it current 30.5%.
"It would be good if this can happen, because labor costs in Hungary are so high," said Adam Gere, head of the task force and managing director of Sedgwick Noble Lowndes Kft., Budapest. "Hopefully, (tax) collection will be better if the amount is lower. Today, tax evasion is a huge problem."
The task force also is leaning toward allowing current workers to decide whether they want to divert any of their future contributions into the private defined contribution funds. Individuals entering the work force from Jan. 1, 1997, would be required to divert 10% of pay into a private fund, while the remaining 18% payroll tax would go into the state pension system.
Previously, the task force had weighed requiring workers younger than 40 to contribute one-third of their payroll tax into the private funds (Pensions & Investments, March 4). Older workers would have remained in the state system.
Under the contemplated changes, however, Mr. Gere said people who choose to stay in the state scheme will lose some of their accrued rights because there won't be as much money in that pay-as-you-go system. The amount they will lose hasn't been decided.
The new system "gives people more freedom, more control," Mr. Gere said. "People can decide (whether to switch systems) based on their earning power and where they see the future of the economy going."
Mr. Gere believes it is critical to pass the legislation this year, so a major education campaign explaining the new structure can start in 1997.
Despite the advances made by the group, some sticking points remain.
Some observers and task force members fear union opposition to the bill. The unions are closely allied to the ruling Socialist party and control the existing social security fund, called the National Pension Fund.
The state pension system ran a deficit of $139 million last year and could go bankrupt in 20 years if the system isn't changed, said Tibor Parniczky, vice president of the Supervision of the Voluntary Mutual Benefit Funds, a regulatory authority.
"They (the unions) are losing power so they're not happy, but something needs to be done," Mr. Gere said.
The safety of retirement assets also is an issue. Some members of the working group want to require employees to participate in plans sponsored by their employers, and not to have the freedom to switch plans.
Mr. Gere worries if an employee is not satisfied with a pension fund, the only way to remedy the situation would be to change jobs. He would prefer to see Hungary adopt more of a Chilean model, where private funds compete for members.
Also, there is a division of opinion as to whether the law should require external management of the new funds.
Some working party members oppose requiring that the new pension funds be managed by an outside professional.
In an internally managed system, "it is impossible to distinguish administrative expenses and operating costs so it difficult to express real yields," said one working group member who asked not to be identified. "It lacks standard methods of objective evaluation."
In addition, officials have not yet decided whether companies that already have set up voluntary mutual benefit funds for their employees can simply convert those funds into retirement vehicles.