Hungarians faced a tough choice last winter: either put your private retirement funds into the state’s fund or lose your state retirement fund. This move is designed to help the struggling country get out of its deficits and back into the target zones as defined by the European Union.
Back in 1998, Hungarians were required to put a part of their retirement funds into private retirement funds. This system was meant to supplement the state’s retirement funds. Now, about 3 million Hungarians have private retirement funds. They will have until January 31st, 2011 to make up their minds whether to return to the state retirement plan which is based on a pay-as-you-go model. Unless a person specifically opts out of the plan, their private retirement funds will automatically be put into the state.
Regardless of what the citizens choose, they have a lot to lose. If they return to the state retirement plan, then their pensions will be held in individual accounts and spouses will not be able to inherit them. Those who decide to stay with the private retirement funds will lose their rights to the part of the state retirement fudn which they would have gotten as based on their future contributions.
Hungary is not the first to pull this tactic in a desperate attempt to get out of debt. Argentina did the same in 2001 when it took approximately $3.2 billion from retirement funds before they were able to stop paying their debts. In Europe, Poland, Bulgaria, Ireland and France are also dipping into the private retirement funds like personal piggy banks.
While Hungary may not be alone in their decision, the deal they are offering citizens is particularly bad because the losses for remaining in the private sector are so great. As Zoltan Torok, an economist with Budapest’s branch of Raiffeisen Bank said about the deal pushing Hungarians towards the state fund, “It’s probably enough to ensure that no one is going to stay in the private pension fund system in his or her right mind.”