Abstract
The sustainability of an unfunded pension system depends highly on demographic and labour market trends, i.e. how fertility, mortality, and employment rates change. In this paper we provide a brief summary of recent developments in these fields in Hungary and draw up a picture of the current situation. Then, we forecast the path of the economic old-age dependency ratio, i.e. the ratio of the elderly and employed populations. We make different alternative assumptions about fertility, mortality, and employment rates. According to our baseline scenario the dependency ratio is expected to rise from 40.6% to 77% by 2050. Such a sharp increase makes policy intervention inevitable. Based on our sensitivity analysis, the only viable remedy is increasing the retirement age.
Highlights
The first nationwide public old-age pension system of Hungary dates back to 1928
The quality of pension systems is frequently assessed according to the three criteria of sustainability, adequacy and fairness
In the first part of our analysis, we examine the effects of the three sociodemographic factors of fertility, longevity and employment on the sustainability of the pension system, and we implicitly assume net migration to be zero, following Bajkó et al (2015)
Summary
The first nationwide public old-age pension system of Hungary dates back to 1928. The current unfunded system was established in 1951, and it was further extended into a three-pillar system in 1998, with an unfunded first pillar, a privately owned, fully funded second-pillar (effectively abolished in 2011), and a fully funded, voluntary third pillar, which has over one million members. More than two million people receive first-pillar pensions (Hungarian Central Statistical Office 2019). We only focus on the criterion of sustainability by examining the predicted long-term evolution of the economic old-age dependency ratio, i.e. the ratio of the elderly and employed populations, thereby counting individuals instead of modelling cash-flows, which would require a more sophisticated approach. The evolution of the economic old-age dependency ratio, an important indicator of pension sustainability, is largely determined by socio-demographic and system-related factors. The former includes factors like fertility, longevity, employment and migration, while the latter comprises pension parameters (such as the retirement age, contribution rates, etc.) and the structural nature of the system (such as the number and types of pillars, the existence of notional accounts, etc.)
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