Impact of the Economic and Financial Crisis on Pension Systems in Central and Eastern Europe: Hungary*

Abstract

By 2008, the Hungarian pension system had grown too generous (with the average pension to average net wage ratio equaling 70%) and the implied contribution rate (32%) was hindering growth (dropping to 1% in 2007). When the international economic and financial crisis deprived Hungary of normal credits, the country’s government turned to international organizations for help. The most spectacular element of the conditions attached to the bailout package was the short and long-term reduction of pension benefits. Within months, the Hungarian government eliminated the unsustainable 13^th month benefit, reduced health-insurance contribution rates, replaced wage-price indexation with price indexation and drastically increased the normal retirement age in the medium-run. The newly elected conservative party practically shut down the second pillar and used up the released capital not only to reduce the government deficit and debt but also to finance public expenditures.