How not to implement: Hungarian pension reforms in an institutionalist perspective

Open Access

Abstract

After 1989, Hungary inherited a pension system characterised by an unfair and impenetrable mix of social insurance and social assistance. Widespread public dissatisfaction and the near drift into a financial crisis in the mid 1990s cleared the path for the first paradigmatic multipillar reform in Central and Eastern Europe (CEE), thereby attracting major international attention. Implementation, however, did not live up to the very high expectations. Ten years down the road, the new Hungarian pension system stands indeed as a model, but of partial failures and unintended consequences. Applying a historical institutionalist framework, it will be shown that Hungarian pensions underwent both agency-based and structural institutional degeneration. These two phenomena, which recent events have shown to be common for newly legislated multipillar pension schemes, capture those situations where structural transformation takes place, but where, in practice, the old institutional structures 'contaminate' the new institutional arrangements, thereby enabling the blending of old and new logics of action. In the worst-case scenario, degeneration may lead to the demise of the new institutional arrangement. In the case of Hungary, its retirement system is a paradigmatic case of poor and hasty institutional design. The expectations of involved actors failed to adapt, as neither policymakers nor private pension providers play by the rules of the game. The former indulge in extreme political budget cycles and the latter cannot self-regulate, thereby distorting competition. Furthermore, institutional complementarities are not gainfully exploited, since unfortunate policy solutions rendered the mandatory funded pillar costly, inefficient and disadvantageous with respect to the public scheme. As a consequence, Hungarian pensions are once again in dire need of a structural overhaul. However, at the time of writing, October 2007, a coherent solution is still nowhere in sight and the many weaknesses of PM Ferenc Gyurcsány's government do not bode well. Policymakers shall learn a lot from the Hungarian experience, since it clearly shows that correct implementation may be every bit as problematic as a successful legislative phase.