MacroScope

East Europe’s pension grabs give pause to reformers

By Michael Winfrey
January 7, 2011

The pension grabs by austerity-averse governments in Poland and Hungary could impact this year’s planned reforms in the Czech Republic, causing another emerging European Union member to soften its approach to a looming debt threat tied to an aging population.

Budapest has already drawn criticism for right-wing Prime Minister Viktor Orban’s plan to seize $14 billion of assets in privately held pension accounts to plug a budget hole without having to cut state spending. Poland’s plans, while not as extreme, have also raised eyebrows. Poles now pay about 7 percent of their paychecks into private accounts, but Prime Minister Tusk is planning to cut that to about 2 percent, taking the extra cash to reduce debt and replacing those funds with future state obligations.

To their credit, all three countries are among a group of nine who have lobbied Brussels, without much effect, for big exemptions to their pension reform costs. But while using funds designated for private pension accounts will cut the budget deficit in the short term, economists say it is only a trade-off between replacing short-term deficits with future pension costs, a good way for governments to stay popular but bad for long-term financial health.

These moves are starting to reverberate for the Czechs, the only country in the EU’s emerging East not to have added any significant fund-based elements to their communist-era pay-as-you-go social security. Parties in Prime Minister Petr Necas’s government had originally planned to create an obligatory pillar in which workers would have to pay at most 3 or 4 percent of their gross salaries into private accounts, unlike the 6-8 percent from the Hungarian and Polish systems.

But Necas is  softening his stance. Although he called Hungary’s moves “incomprehensible” this week, he also said an over-eagerness by eastern European officials to please Brussels and the International Monetary Fund had created unsustainable systems. “In my opinion, it supports our theory that it is perhaps better to give priority to voluntary retirement savings rather than obligatory”, he said.

But a voluntary, rather than obligatory, approach will do little to solve the demographic puzzle. It could leave many Czechs in the same loss-making pension system that, unless changed, will be a huge drain on public finances by 2050, when Necas estimates there will be as many Czechs over the age of 60 as workers. And that could mean that like Poland and Hungary, the Czechs would be pushing their looming social security problems, and the enormous debts involved, into the future.

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