Hungary's government might be shooting the country's economy in the foot by backing away from pension reform. It has proposed revising the pension law, which requires all new entrants into the job market to join the privately managed system. The law allows older workers to opt out of the government pension system and join the private system on a voluntary basis.
The proposed revision would make joining the private system voluntary for all. Unfortunately, the change in the government's position has raised doubts among all workers about whether joining the private system is a good idea.
Raising doubt about, and reducing participation in, a private, funded retirement system can only harm the economic well-being of the economy in the long run.
As the experiences of the U.S., Chile and Australia have shown, retirement savings -- whether from defined benefit or defined contribution pension plans -- channeled through free capital markets where companies compete for funds to expand and grow, are a powerful force for economic growth.
The Hungarian government's backpedaling was caused by the fact that too many workers wanted to switch to the private system. This was a sign of success; something to be applauded, not discouraged.
But short-term it caused a larger deficit in the government retirement system because employees who signed up for the private system no longer contributed to the government system, although their employers still did.
Reversing course might help the Hungarian government short-term, but hurt economic growth, and hence government revenue, long term. It should stay the course.
