Government spent private pension funds on state debt

In testimony in Parliament on Thursday, State Secretary András Tállai said that Hungaryʼs Pension Reform and Debt Reduction Fund was spent on controlling state debt.

That fund was created by the government in 2011, and at the time officials said the money would be placed together with the public pension fund, with the stated goal of reforming the pension system. Instead, almost all the HUF 2.9453 trillion taken from private pension funds were spent to cover shortfalls in the government budget, and the Pension Reform and Debt Reduction Fund was terminated on January 31, Hungarian online daily index.hu said on Thursday.

In 2010, the newly elected Fidesz government passed laws making it difficult to keep a private pension, thereby forcing savers to switch their pensions over to the public pension fund. The renationalization of private pensions was part of the “unorthodox economics” that the government said would prevent it from needing further IMF loans.

Index.hu reports that the government was forced to use private pensions to cover debts because, by the end of 2010, half a year after Fidesz took power, the central budget had a hole of HUF 600 bln due to tax cuts.

When the state started taking over private pensions in 2010, government officials said that those surrendering their private pensions to the public pension fund would receive individual retirement accounts, so that their extra contributions would be acknowledged. But a law passed in April 2013 effectively eliminated the idea of separate accounts for former private pension holders.

Still, the idea may be revived. According to a report in The Budapest Beacon, János Lázár, the head of the Prime Ministerʼs office, has said: “That was an important promise made by the Ministry of National Economics that there would be individual accounts. The pension administration is currently working on creating this.”

Although the Hungarian government spent the funds on reducing the state debt, that debt has recently grown to record heights. Hungarian daily Világgazdaság, citing data by the Government Debt Agency (ÁKK), reported in mid-July that state debt grew over HUF 25,000 bln in June, HUF 1377 bln more than a year before.

Tállai maintained on Thursday that, as a result of the transfer of almost HUF 3 trillion from private pension funds to “the state pension pillar”, Hungaryʼs state debt as a percentage of GDP was reduced by almost ten percentage points, while interest costs fell by HUF 284 bln. Out of the HUF 2.9453 trillion in private funds transferred to the state coffers, HUF 2.017 bln was used to reduce state debt directly, and HUF 459 bln was paid into the budget, he said, according to Hungarian news agency MTI. An additional HUF 264 bln in equities of strategically important companies was transferred to the state and payouts of real yields and contributions to former private pension fund members came to HUF 231 bln, he added.

According to index.hu, based on government data, the money the fund spent totals approximately 10% of Hungary’s 2010 GDP.