György Németh: Back in 1998 I did not agree with the creation of a private pension fund system. It should not have been introduced until the public debt fell below 30 percent of the GDP. We now have a situation where this debt is 80 percent of the GDP and ten percent of this can be attributed to the private pension fund system.

Gábor Borza: I don't agree. There are advantages to the capitalised system which made it worth launching. State pensions largely depend on the performance of the economy, but private pension members can make themselves independent of that because we always invest their money in places in the world where we hope to make the most profit.  

Németh: This would be true if we had had to build up a pension system from grass roots. But we have a legacy from the past that has stayed with us: for decades, millions of people have been paying contributions in order to receive a pension in their old age. There should have been a smart reform worked out for this, which is compatible with the high rate of public debt. That did not happen. The private pension fund system actually increases the deficit yet further, since the forints that are paid into the accounts of members are missing from the provision to be paid to the pensioners of today, and this has to be compensated for from the budget.   

Borza: But it's not just visible debt that the state has. There is also a hidden debt, which is incurred by the state owing money to future pensioners in exchange for the contributions they make today.

Németh: That's true, I'm not contesting it.

Borza: The private pension fund system reduces this deficit problem for the future, as part of the future pensions of the members will be paid by the pension funds rather that by national insurance contributions. Thus, while this is in fact a form of saving, the EU regards it as deficit, which is not right.   

Németh: That's true, but from the point of view of financial vulnerability it is the visible deficit that counts and this is increased by private pension funds. That's why the appeal to the EU made by Hungary and the other eight member states affected, in which they requested that the state funds paid into private pension funds be accounted as savings rather than as deficit, stood no chance at all.  

Borza: However, the fact that the EU rejected the appeal is the real, albeit unsaid, reason why the government wants to put an end to pension funds; since without making this step, it would not possible to keep to the planned state budget deficit for 2011. It's sad that that in the meanwhile they are talking about disappearing yields and accounting deficiencies.  

Németh: I would more understanding towards the government if they used the assets taken away from private funds to reduce public debt to the last penny, as that would also make the country less endangered financially. Instead, we are using up at least a quarter of it to fund on-going expenditure. This is a grave mistake.

Borza: Let me mention another angle. Can we be sure that the present pension regulations will be valid in ten years' time? Will pensions be raised in the same way and will the retirement age be the same? Private pension fund members have a tangible account in their hands, they can say ‘this is mine and I will get it one day'. But is this also the case with state pensions?

Németh: It isn't, I have to admit you're right. The new constitution should guarantee the "forint promises" in regard to the pension system, just like it does in the case of the settling of the country's state debts. After all, it's about the same thing.

Borza: Even if the government acts with the best of intentions, it still cannot keep its promises. At present if somebody has worked for 40 years, they are paid a pension amounting to 80 percent of their net salary. Where will that much money come from? State pensions are always paid to older people by the younger generation. To maintain the balance an average of 2.1 children need to be born into every family but the actual figure is only 1.2. There will not be enough contributors.

Németh: Let me make this clear: if our society collapses, then the pension system will collapse too, whatever form it takes. And that is why population growth - alongside the integration of the Roma population - is the most pressing issue.

Borza: Children born in the future won't solve the problems of our generation and that is why fund members have to carefully consider what to do. According to the harsh measures announced now, the future payments of those who stay in the private pension funds will not constitute an entitlement to pension. If I look at it from the present, there's no rational reason for anyone to stay in the private pension funds. However, those who will be retiring in 25 years have to take into account that by then there will be a million fewer contributors and two million more pensioners. In view of this a return to a state pension is not necessarily a rational decision either.

Németh: I think it is, despite the difficulties. I would propose that the government set up a second pillar, in which it would guarantee a three-percent real rate of return corresponding to government securities. 

Borzsa: A state "private pension fund"?

Németh: A new type of accounting system. Part of state contributions would be paid to a private account, and thus incur interest like government bonds. In addition the private pension funds should not be abolished. There should be competition, that is, private funds should compete with the yields of the state securities. The state would then immediately become interested in a disciplined fiscal policy and in lowering the risk interest surcharge, while the funds would adopt a cost-efficient model of operation and thus increase profits.

Borza: I would dispute that the private pension fund members received lower yields.

Németh: You cannot expect 10-12 percent profit from such a vast apparatus on a long term basis, and the real rate of return is very small. Indeed, the Hungarian Financial Supervisory Authority spoke of "mildly negative" real rates of return for the last 12 years.

Borza: And what's the situation in regard to the state pension? In the last few years the 13^th monthly pension was stopped, starting provisions were reduced and the age of retirement was raised, and annual increases have been smaller. This is definitely a "negative return".

Németh: True, and that's why the operation of the state system must be changed.  

Borza: The state has asked us to provide high level services to our clients and that costs money. If a fund member calls our customer services, they are able to check their balance within minutes. In the case of the state pension if somebody reaches retirement age, they are told to start gathering their documents...

Németh: I don't doubt it and that's why the state insurer is green with envy. It's another issue that the private pension funds - there being no law - have not been able to pay anyone their pension.  

Borza: We have paid several thousand members the sums on their accounts in one amount - it's another matter that we don't know how to progress until the decision-makers have elaborated the regulations on entitlements. If somebody reaches retirement age we need to know what to base our calculations on in regard to raises. Should it be inflation? Or should we use the Swiss index, which is an average of net earnings and inflation? Or should it be the state pension raise percentage, which was turned into a ridiculously complex method during the election year? Depending on the method used, the monthly pension calculated from the same amount can differ by as much as to two- or even threefold.

Németh: A state pension should be calculated in a way that - to use an expression which is professionally inexact but makes the point - "everybody would get as much as they paid in". If this is not the case, then the pension system will remain in the political arena.

Borza: You make it sound like the private pension funds had already stopped functioning. We will try to stop this happening with every democratic forum available. It is unacceptable that people who stay in the funds will not be entitled to a pension for the same amount of contributions from an employer as those who belong to a purely state system. This is discrimination and we can see a chance for success at an international level and for the present or next government having to revert to the present system, even if they temporarily abolish it. However, for those who go back to a purely state pension system, this opportunity will be lost.     

Németh: The government is really not offering any real choice in this matter since the conditions are so bad for anybody who would like to stay in the private pension funds. People have noted this and it will be a thorn in the side even for those who did not receive a real rate of return on their accounts. The governments said one thing and did another and therefore many people who voted for them in 2010 will punish them in 2014.

Borza: Although they did promise, there will not be real private accounts; instead a daily log will be kept on salaries, which is not the same thing.

Németh: But at least there should be a private account for the part of the contributions that have been paid to private pension funds so far. Then the government would be giving people a choice. The decision would be advantageous from a macro-economic standpoint, since the most committed 10-15 percent would stay in the private pension funds and the government could come out of the whole episode with its head held high. Instead, this is the first serious mistake the government has committed while in office - but it is so serious that in four years' time it could lead to its downfall.

Borza: If enough people believe that others also believe it is worth staying in the private pension funds, the private pension fund system may stay afloat. People are able to force the government to change their policy; this is an existing alternative and much more rational than somebody grabbing the 100 thousand forints of actual profit from 1.8-million-forint savings and taking it home like a plate of lentils. 

Németh: This is an indication of a glitch in the government's operation. In a country where the pension system deficit is so high, how can money be given back to those who are still active? Instead there should be an individual account to which their payments are transferred.

Borza: Considering that originally you didn't support the creation of private pension funds, I see that we agree on a lot of things.

Németh: I'm dr Jekyll and Mr Hyde. From a macro-economic standpoint I oppose it, but from a pension policy standpoint I approve of it. The first thing that needs to be done is to reduce public debt to a fraction of the 80 percent it is currently running at. From a macro- economic standpoint the private pension fund system came too early.  

Borza: Are you sure that if there were no private pension funds, the country wouldn't have used up the money spent on the funds over the last 12 years? Wouldn't they have squandered it on a 14^th-month pension payment or on giving support to the upper-middle class to buy property?

Németh: The right decision would be for all of the money from those returning to the state pension to be used to decrease public debt, alongside fair competition, because this would also reduce the debt interest burden.

Borza: But then it wouldn't just be the 10-15 percent of members who would stay with us as you claim but the overwhelming majority, and this would reduce the government's plans to nothing. Moreover, I don't support lowering interest rates either: if the rule of law is compromised in a country, investors do not go there and interest rates rise The members have to decide by the end of January, and I hope that some long queues will form outside the national pension insurance office because a lot of people will want to stay in the funds.

Németh: I still don't regard staying in a private fund as reasonable. However, even though many people will return to a purely state pension scheme, what happened will still be a thorn in their sides. Straightforward nationalisation would have been a fairer decision than this.