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I thought the Pension ponzi/pyramid scheme was only in USA. But I was wrong - emerging European countries are in more dire straits. 1/3rd are pensioners in Hungary. Atleast USA has a steady growing population via both birth and immigration. How about other countries - Japan, Italy, Germany, Russia, Emerging countries which I guess are having declining population.
Now in a country with a declining population - will buying a long term bond make sense. At maturity will the real value of currency hold ?
About Hungary
http://online.wsj.com/article/SB123793340762430957.html
Now in a country with a declining population - will buying a long term bond make sense. At maturity will the real value of currency hold ?
About Hungary
http://online.wsj.com/article/SB123793340762430957.html
Originally posted by WALL STREET JOURNAL
BUDAPEST -- To understand why Hungary's economic crisis is imperiling Eastern Europe and the rest of the Continent, consider the pension application of 40-year-old Tamás Szabó.
A year and a half ago, Mr. Szabó was riding his motorcycle to work when an oncoming car turned suddenly and slammed into his bike. Now he says he has trouble moving his left ankle. He can't carry boxes, he says, limiting his career as a truck driver. He hasn't sought retraining and isn't sure he can find other work.
So on a recent morning, Mr. Szabó limped to the counter at a government building here and put in his paperwork for a state pension. The odds are good that he'll receive a monthly check for much of what he'd make if still working, for the rest of his life.
It's a story that goes to the heart of the country's economic mess. Hungary, a nation of 10 million, has three million pensioners. Besides writing checks for regular retirees, the government gives special benefits to accident victims, the disabled, military and police veterans, mayors, widows, farmers, miners and "excellent and recognized" artists. The average Hungarian retires at 58, and just 14% of Hungarians between 60 and 64 are working, compared with more than half of Americans.
Hungary's pension obligations are helping to remake the country's politics. On Tuesday, former Hungarian central bank governor György Surányi emerged as a preferred candidate to replace Prime Minister Ferenc Gyurcsány, who announced on Saturday that he would step down amid battles over spending cuts.
Hungary has run fiscal deficits for years to pay for social programs, and its annual tab for pensions now surpasses 10% of its gross domestic product. The government had sold bonds to finance these outlays. In October, investors stopped buying them. The International Monetary Fund provided an emergency bailout so Hungary could pay its bills. But many international investors have pulled out of Hungary, sending the country's currency tumbling and darkening its economic outlook.
Hungary poses the global financial crisis's biggest challenge yet to the European Union, which is fiercely debating how, or whether, to attempt a rescue. The country's economy is 10 times the size of Iceland's, the victim of Europe's deepest collapse.
Similar problems with deficit spending and declining currency have hit neighboring Romania, which is expected on Wednesday to agree to an IMF aid package of €19 billion, or about $25.6 billion. On Tuesday, political turmoil spread to the Czech Republic, whose coalition government lost a no-confidence vote and will be forced to step down.
The Czech Republic, Poland and others in Central and Eastern Europe -- in less dire straits thanks to healthier government finances -- fear that if Hungary spirals into collapse or deep recession, investors will pull money out of the whole region. That would hurt the Western European economies that have mined their emerging neighbors for growth. Hungary imports heavily from Germany, and borrows from Austrian and Italian banks.
Pensions weigh heavily on Hungary's public finances. Employers and employees in the country's work force of roughly four million pay into the state pension program. But their contributions don't cover all the benefits paid. The government makes up the difference out of the central budget. Members of Prime Minister Gyurcsány's Socialist party have been protective of pensioners, wary that cuts could fall hard on the older Hungarians who form a key Socialist voting bloc.
Critics say the country can't afford not to reform pensions. The system, many say, gives Hungarians an incentive to retire young or leave the work force for relatively minor ailments. The IMF, backed by Hungarian reformers, wants cuts -- particularly to a bonus monthly payment made to all retirees, known as the "13th month."
The system "fails on pretty much every level," says Mark Pearson of the Organization for Economic Cooperation and Development, of which Hungary is a member.
Paring back will be difficult, especially at the moment when economic crisis and rising unemployment threaten to leave those at society's margins with little else to lean on. Aging retirees accuse politicians of dismantling the promises of a previous generation and leaving them to dangle in the breeze.
View Full Image
Getty Images'We want a new election,' read a protest banner in Budapest last weekend. Hungary's rich pensions are a core element in the country's financial crisis, which led to Prime Minister Ferenc Gyurcsány offering his resignation.
"They are taking the 13th month away from pensioners, but amongst each other they give millions," says Sándor Nyéki, a trim 73-year-old out for an afternoon swim at the Széchenyi baths in central Budapest, a popular spot for retirees. (A common complaint among Hungarians is that politically connected insiders profited from privatization.) Asked what he'll cut from his budget if the 13th month disappears, he answers: "Food."
This country of fertile plains has been conquered by Turks, forced into empire with Austria and occupied by Germans. Its widespread pension programs are a holdover from the country's domination by the Soviet Union.
After the Soviets crushed the 1956 Hungarian Revolution, leaders in Budapest made an implicit deal with the people, says Yusaf Akbar, an associate professor at Central European University's business school. In exchange for no more social disruptions, the leaders would provide modest freedoms and a comfortable state welfare net.
After the fall of the Soviet Union, Hungary's formerly communist neighbors were keen to dismantle the old state system. The Baltic countries of Latvia, Lithuania and Estonia became showcases for shrinking government. Slovakia moved to a low flat tax. Budapest, too, embraced capitalism and championed privatization, but even as it shrunk the state it attempted to retain its social safety net.
The number of pensioners swelled in the early 1990s as newly privatized companies dumped workers who had been on the state payroll. Unemployment was high, and drawing a pension was an attractive alternative to working.
When his state-owned employer went private in 1993, Mr. Nyéki, the 73-year-old bather, didn't bother looking for another job. A truck driver who worked hauling aluminum, Mr. Nyéki took a pension he says was "good money" at the time. Today, it comes to 62,000 forints a month -- about $280.
Communism left a mentality of dependence on the state, says Péter Holtzer, the chairman of a round-table group of experts convened by the government to examine the pension system. "Those 40 years -- it seems one generational change is not enough. It requires one or two more," he says. "Many of the problems we have are because this new democracy has not had time to create checks and balances."
A stab at reform in 1997 shifted the country toward private pensions, but politicians eager for votes subsequently larded the public system back up -- the biggest hunk of pork being the 13th month, introduced in 2003 by Mr. Gyurcsány's predecessor.
Now, the average pension runs about 80,000 forints, or $350 a month. The untaxed benefit goes a good way in a country where the average after-tax wage amounts to just over $500 a month.
In Eastern Europe, only Slovenia and Poland spend a greater portion of gross domestic product on pensions. But Slovenia is far richer, and Poland is working to pull the figure down sharply in coming years. Hungary's pension outlays, on the other hand, will be among Europe's fastest-growing in coming decades, the OECD estimates.
Critics say the problems with Hungary's pension system are manifold. Higher-income workers receive a larger share of their working wages than those in many other countries do. Men reach full retirement by 62, but can take a pension earlier if they have 40 years of service -- giving little incentive to continue working. There are also myriad ways, they say, for workers to retire even earlier than that.
The office charged with scrutinizing disability claims, the National Rehabilitation and Social Assistance Institute, has 166 examiners to scrutinize pension claims, and reviewed 72,500 new disability applications last year. Disability approvals have fallen, but critics say Hungary still awards pensions to workers whose conditions wouldn't keep them out of other countries' work forces. The state office relies heavily on the assessments of workers' own doctors, according to its deputy chief, Erzsébet Forgó. She says the office can't afford optometry machines to verify claims of poor eyesight.
"Unfortunately, for now, if someone says they are disabled with certain illnesses, we can't investigate," Ms. Forgó says.
Mr. Szabó, the injured motorcyclist, concedes that he could seek retraining for a different line of work. But finding a field "where you make a living and get hired, that's a problem," he says. A pension, he says, is his best guarantee of a stable income.
To pay for all of this, Hungary levies high taxes and has borrowed to make up the rest. The tax burden has driven the cost of labor up faster than in neighboring countries, hurting Hungary's competitiveness.
"Today, Hungary is no longer at the cutting edge," says Les Nemethy, a Canadian who came to Hungary in 1991 to work for the state privatization entity. Mr. Nemethy, who runs a small investment-banking firm in Budapest, says his firm has to spend just over one million forints a month in income and payroll taxes so that an employee can have 395,000 forints in take-home pay. This "tax wedge" -- the difference between what the employer pays and what the employee takes home -- is the second-highest in the OECD, behind Belgium.
Hungary's budget deficit makes tax reform difficult. Even as other counties around the globe are pumping stimulus funds into their economies, Budapest is cutting costs.
Mr. Gyurcsány had proposed some changes. He preached austerity starting in 2006, after he was caught on tape admitting that the government lied to camouflage how bad the fiscal situation was ahead of elections. He has since proposed cutting the 13th-month bonus, but for existing retirees would spread the money out over the other 12. He proposed raising the retirement age to 65, but not until 2050.
His replacement, expected to begin work within the month, will likely be forced to suggest deeper cuts that could prove particularly disruptive for a generation of older Hungarians.
Ilona Brebán, 77, retired two decades ago from the state mine agency. Picking up vegetables at a central Budapest market for a cabbage fözelék, a hearty stew, she said she lives on 89,000 forints a month, or about $400. Her heating bill can reach 29,000 forints. "How do you make a living on the rest of it?" she asked.
There's no easy political solution, said pensioner István Szücs. On a recent weekday, the 76-year-old former mechanic and driver sat in a bar on the market's lower level, sipping at a late-morning pilsner.
"They put a lot of money into the hat to give to people," Mr. Szücs said, doffing his ribbed tan trilby. "But now, if you don't have any money in the hat, it doesn't matter who is prime minister."
A year and a half ago, Mr. Szabó was riding his motorcycle to work when an oncoming car turned suddenly and slammed into his bike. Now he says he has trouble moving his left ankle. He can't carry boxes, he says, limiting his career as a truck driver. He hasn't sought retraining and isn't sure he can find other work.
So on a recent morning, Mr. Szabó limped to the counter at a government building here and put in his paperwork for a state pension. The odds are good that he'll receive a monthly check for much of what he'd make if still working, for the rest of his life.
It's a story that goes to the heart of the country's economic mess. Hungary, a nation of 10 million, has three million pensioners. Besides writing checks for regular retirees, the government gives special benefits to accident victims, the disabled, military and police veterans, mayors, widows, farmers, miners and "excellent and recognized" artists. The average Hungarian retires at 58, and just 14% of Hungarians between 60 and 64 are working, compared with more than half of Americans.
Hungary's pension obligations are helping to remake the country's politics. On Tuesday, former Hungarian central bank governor György Surányi emerged as a preferred candidate to replace Prime Minister Ferenc Gyurcsány, who announced on Saturday that he would step down amid battles over spending cuts.
Hungary has run fiscal deficits for years to pay for social programs, and its annual tab for pensions now surpasses 10% of its gross domestic product. The government had sold bonds to finance these outlays. In October, investors stopped buying them. The International Monetary Fund provided an emergency bailout so Hungary could pay its bills. But many international investors have pulled out of Hungary, sending the country's currency tumbling and darkening its economic outlook.
Hungary poses the global financial crisis's biggest challenge yet to the European Union, which is fiercely debating how, or whether, to attempt a rescue. The country's economy is 10 times the size of Iceland's, the victim of Europe's deepest collapse.
Similar problems with deficit spending and declining currency have hit neighboring Romania, which is expected on Wednesday to agree to an IMF aid package of €19 billion, or about $25.6 billion. On Tuesday, political turmoil spread to the Czech Republic, whose coalition government lost a no-confidence vote and will be forced to step down.
The Czech Republic, Poland and others in Central and Eastern Europe -- in less dire straits thanks to healthier government finances -- fear that if Hungary spirals into collapse or deep recession, investors will pull money out of the whole region. That would hurt the Western European economies that have mined their emerging neighbors for growth. Hungary imports heavily from Germany, and borrows from Austrian and Italian banks.
Pensions weigh heavily on Hungary's public finances. Employers and employees in the country's work force of roughly four million pay into the state pension program. But their contributions don't cover all the benefits paid. The government makes up the difference out of the central budget. Members of Prime Minister Gyurcsány's Socialist party have been protective of pensioners, wary that cuts could fall hard on the older Hungarians who form a key Socialist voting bloc.
Critics say the country can't afford not to reform pensions. The system, many say, gives Hungarians an incentive to retire young or leave the work force for relatively minor ailments. The IMF, backed by Hungarian reformers, wants cuts -- particularly to a bonus monthly payment made to all retirees, known as the "13th month."
The system "fails on pretty much every level," says Mark Pearson of the Organization for Economic Cooperation and Development, of which Hungary is a member.
Paring back will be difficult, especially at the moment when economic crisis and rising unemployment threaten to leave those at society's margins with little else to lean on. Aging retirees accuse politicians of dismantling the promises of a previous generation and leaving them to dangle in the breeze.
View Full Image
Getty Images'We want a new election,' read a protest banner in Budapest last weekend. Hungary's rich pensions are a core element in the country's financial crisis, which led to Prime Minister Ferenc Gyurcsány offering his resignation.
"They are taking the 13th month away from pensioners, but amongst each other they give millions," says Sándor Nyéki, a trim 73-year-old out for an afternoon swim at the Széchenyi baths in central Budapest, a popular spot for retirees. (A common complaint among Hungarians is that politically connected insiders profited from privatization.) Asked what he'll cut from his budget if the 13th month disappears, he answers: "Food."
This country of fertile plains has been conquered by Turks, forced into empire with Austria and occupied by Germans. Its widespread pension programs are a holdover from the country's domination by the Soviet Union.
After the Soviets crushed the 1956 Hungarian Revolution, leaders in Budapest made an implicit deal with the people, says Yusaf Akbar, an associate professor at Central European University's business school. In exchange for no more social disruptions, the leaders would provide modest freedoms and a comfortable state welfare net.
After the fall of the Soviet Union, Hungary's formerly communist neighbors were keen to dismantle the old state system. The Baltic countries of Latvia, Lithuania and Estonia became showcases for shrinking government. Slovakia moved to a low flat tax. Budapest, too, embraced capitalism and championed privatization, but even as it shrunk the state it attempted to retain its social safety net.
The number of pensioners swelled in the early 1990s as newly privatized companies dumped workers who had been on the state payroll. Unemployment was high, and drawing a pension was an attractive alternative to working.
When his state-owned employer went private in 1993, Mr. Nyéki, the 73-year-old bather, didn't bother looking for another job. A truck driver who worked hauling aluminum, Mr. Nyéki took a pension he says was "good money" at the time. Today, it comes to 62,000 forints a month -- about $280.
Communism left a mentality of dependence on the state, says Péter Holtzer, the chairman of a round-table group of experts convened by the government to examine the pension system. "Those 40 years -- it seems one generational change is not enough. It requires one or two more," he says. "Many of the problems we have are because this new democracy has not had time to create checks and balances."
A stab at reform in 1997 shifted the country toward private pensions, but politicians eager for votes subsequently larded the public system back up -- the biggest hunk of pork being the 13th month, introduced in 2003 by Mr. Gyurcsány's predecessor.
Now, the average pension runs about 80,000 forints, or $350 a month. The untaxed benefit goes a good way in a country where the average after-tax wage amounts to just over $500 a month.
In Eastern Europe, only Slovenia and Poland spend a greater portion of gross domestic product on pensions. But Slovenia is far richer, and Poland is working to pull the figure down sharply in coming years. Hungary's pension outlays, on the other hand, will be among Europe's fastest-growing in coming decades, the OECD estimates.
Critics say the problems with Hungary's pension system are manifold. Higher-income workers receive a larger share of their working wages than those in many other countries do. Men reach full retirement by 62, but can take a pension earlier if they have 40 years of service -- giving little incentive to continue working. There are also myriad ways, they say, for workers to retire even earlier than that.
The office charged with scrutinizing disability claims, the National Rehabilitation and Social Assistance Institute, has 166 examiners to scrutinize pension claims, and reviewed 72,500 new disability applications last year. Disability approvals have fallen, but critics say Hungary still awards pensions to workers whose conditions wouldn't keep them out of other countries' work forces. The state office relies heavily on the assessments of workers' own doctors, according to its deputy chief, Erzsébet Forgó. She says the office can't afford optometry machines to verify claims of poor eyesight.
"Unfortunately, for now, if someone says they are disabled with certain illnesses, we can't investigate," Ms. Forgó says.
Mr. Szabó, the injured motorcyclist, concedes that he could seek retraining for a different line of work. But finding a field "where you make a living and get hired, that's a problem," he says. A pension, he says, is his best guarantee of a stable income.
To pay for all of this, Hungary levies high taxes and has borrowed to make up the rest. The tax burden has driven the cost of labor up faster than in neighboring countries, hurting Hungary's competitiveness.
"Today, Hungary is no longer at the cutting edge," says Les Nemethy, a Canadian who came to Hungary in 1991 to work for the state privatization entity. Mr. Nemethy, who runs a small investment-banking firm in Budapest, says his firm has to spend just over one million forints a month in income and payroll taxes so that an employee can have 395,000 forints in take-home pay. This "tax wedge" -- the difference between what the employer pays and what the employee takes home -- is the second-highest in the OECD, behind Belgium.
Hungary's budget deficit makes tax reform difficult. Even as other counties around the globe are pumping stimulus funds into their economies, Budapest is cutting costs.
Mr. Gyurcsány had proposed some changes. He preached austerity starting in 2006, after he was caught on tape admitting that the government lied to camouflage how bad the fiscal situation was ahead of elections. He has since proposed cutting the 13th-month bonus, but for existing retirees would spread the money out over the other 12. He proposed raising the retirement age to 65, but not until 2050.
His replacement, expected to begin work within the month, will likely be forced to suggest deeper cuts that could prove particularly disruptive for a generation of older Hungarians.
Ilona Brebán, 77, retired two decades ago from the state mine agency. Picking up vegetables at a central Budapest market for a cabbage fözelék, a hearty stew, she said she lives on 89,000 forints a month, or about $400. Her heating bill can reach 29,000 forints. "How do you make a living on the rest of it?" she asked.
There's no easy political solution, said pensioner István Szücs. On a recent weekday, the 76-year-old former mechanic and driver sat in a bar on the market's lower level, sipping at a late-morning pilsner.
"They put a lot of money into the hat to give to people," Mr. Szücs said, doffing his ribbed tan trilby. "But now, if you don't have any money in the hat, it doesn't matter who is prime minister."
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