Reforms for Stability and Sustainable Growth

An OECD Perspective on Hungary

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EU accession in 2004 has confirmed Hungary’s successful transformation from a centrally planned economy into a functioning market economy operating within the framework of a multi-party democracy. However, the country’s output per capita is still well below the EU average, and public expenditures exceed revenues by a large margin. This report looks at ongoing efforts to restore fiscal balance and promote sustainable growth to accelerate the convergence process. Drawing on the experience of OECD member countries it proposes structural reforms to achieve these objectives, covering the following topics:

• Fiscal policy: Deficit reduction and making taxes and expenditures more growth friendly.

• Health care reform: Improving efficiency and quality of care.

• Pension reform: Providing old-age income security in the face of population ageing.

• Employment and social policies: Making formal employment more attractive.

• Education reform: Improving human capital formation.

• SME promotion:  Increasing competitiveness and fostering successful entrepreneurship.

• Innovation: Fostering rapid productivity growth.

• Energy policy and the environment: Responding to the threat of climate change.

• Public administration reform: Improving the performance of the public sector.

• E-government: Using technical progress to improve public service delivery.

An overview chapter synthesises the findings, highlighting the interdependence of policy actions in the various areas.



Pension Reform: Providing Old-Age Income Security in the Face of Population Ageing

This chapter reviews the challenges faced by the Hungarian pension system. It presents recommendations for reforms to improve fiscal and social sustainability and to strengthen the payout phase of mandatory private defined contribution (DC) pensions. Comparison with the pension-policy experience of other OECD countries reveals shortcomings in Hungary with respect to incentives for early retirement and low pension coverage of the working age population. Moreover, Hungary lacks appropriate legislation and instruments to convert retirement savings in mandatory DC plans into a stream of income at retirement. Hungary is forecast to experience one of the largest increases in public pension spending over the next 50 years, which raises serious concerns about the financial sustainability of its pension system. The public pension system exhibits replacement rates that are the same for all workers with the same career pattern, which implies virtually no redistribution from rich to poor in the system. This contrasts with the majority of OECD countries, which have systems with higher replacement rates for lower-income workers. By redistributing income, this can reduce the risk of old-age poverty while containing total public spending on old-age incomes. The chapter also highlights how the pension system affects work incentives for older workers, which helps to explain why the effective retirement age for both men and women in Hungary is the second lowest among OECD countries. It also discusses challenges faced by the Hungarian pension system with respect to governance and regulation of mandatory private pension accounts and how they can be met. This includes issues such as how pension benefits should be paid out; who should provide annuities; how the risk of unfavourable annuity conversion conditions should be spread; how performance, charges and investments of private funds can be improved; and what should be the institutional arrangements in managing the private pension funds.


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