Transcript Measuring Political Risk of Hungarian Social Security

Measuring Political Risk of Hungarian Social
Security System
Is there a really good reform?
Juraj Kopecsni
• To provide a theoretical model for measuring political risk
in PAYG and funded pension schemes
• Empirically quantifies that risk
• Governments can change the structure of the state
scheme
• Analyze changes in the household’s social security
wealth
• The importance of political risk is often underestimated
or neglected
• During pension reforms there are several changes within
rules and legislation, which have different impact on
social security wealth
• Policy makers have no clear picture about impacts of
these changes without such risk analysis
• The pension reform can lead to the worsened rather than
improved situation
Literature
• McHale (2001), Blake (2003) – show the impact of
particular law changes on measure of participants life
time benefits
• Shoven and Slavov (2006) – defined a political risk as
variation in IRR
Why Hungary?
• In Hungary pension reforms are the most advanced
among transition countries
• Multi-pillar system was adopted in 1998 with a
mandatory fully funded pillar
• Eight years of implementation have passed, which raises
a natural interest in the Hungarian reform experience
• Shows how to possible avoid the political risk
Methodology
• According to McHale (2001) political risk is easy to
describe but is hard to quantify
• Measure the political risk as the reduction in social
security wealth for an average worker resulting various
reforms in Hungary
• Given reform will affect different people differently,
depending on gender, age, wage distribution or ageearnings profile
• Assumptions:
The worker’s age-earnings profile is estimated
The worker stars to work at age 20
The workers retires at the standard retirement age and are
eligible for full social security benefits
In calculation of expected social security wealth we use
probability of survivor derived from mortality tables
The discount rate is 4%
Projected inflation is 2%,
Projected gross and net wage growth is 5%
Annuities from 2nd pillar are unisex with Swiss indexation
Projected Interest rate of contribution is weighted average
net real interest rate of all pension funds during 19982005 plus projected inflation
t
x
1 11EmployeeTa


EmployerTa x
SSW(a, T )   w a,t (1 f )tT  (1  d a,k ) 
t T 
k T

R 1
 B(a,R)
   (1 f )tT
t R 
100

(1  ik ) (1  d a ,k )

k  R 1
k T

t
where
SSW - social security wealth
a – year of birth, cohort
T – year of the reform
R – year of retirement
t – current year
B – initial pension
t
f – discount rate
w – gross nominal wage
d – mortality rate
i – indexation rate
Reform 1993
• Retirement age is postponed for Female from 55 to 60
• Initial pension benefit is calculated:
Before –
After –
among last 5 working years 4 best years
from 1988 the whole working period
Reform 1997
• Taxation of Employer is decreased from 24.5% to 24%
• Retirement age is postponed for Male and Female to 62
• Retirement age for Female cohorts 1942-44 is shifted
back by 1 year
• Factor at calculation of initial pension benefit is
increased
Reform 1998
• Taxation of Employer is decreased gradually from 24%
to 22%
• Taxation of Employee is increased gradually from 6% to
9%
• After 2012 the initial pension is calculated from gross
wage instead of net wage
• Indexation
Before - nominal net wage growth with 1 year lag
After –
30%CPI + 70% net nominal wage growth in 2000
50%CPI + 50% net nominal wage growth from 2001
Reform 2003
• Taxation of Employee is increased from 8% to 8.5%
• Contribution of Employee to the 2nd pillar is increased
from 6% to 7%
•
•
•
•
In 2003 additional 25% of monthly pension benefit
In 2004 additional 50% of monthly pension benefit
In 2005 additional 75% of monthly pension benefit
From 2006 additional 100% of monthly pension benefit
-2%
-4%
-6%
19
69
19
63
19
66
19
60
19
54
19
57
19
51
19
45
19
48
19
42
19
36
19
39
19
33
Change 1993 M
10%
8%
6%
4%
2%
Tax
Benefit
0%
-10%
19
38
19
40
19
42
19
44
19
46
19
48
19
50
19
52
19
54
19
56
19
58
19
60
19
62
19
64
19
66
19
68
19
70
Change 1993 F
60%
50%
40%
30%
20%
10%
0%
Tax
Benefit
Change 1997 M
100.0%
80.0%
60.0%
40.0%
20.0%
19
33
19
36
19
39
19
42
19
45
19
48
19
51
19
54
19
57
19
60
19
63
19
66
19
69
0.0%
-20.0%
-40.0%
Tax
Benefit
19
38
19
40
19
42
19
44
19
46
19
48
19
50
19
52
19
54
19
56
19
58
19
60
19
62
19
64
19
66
19
68
19
70
Change 1997 F
30.0%
20.0%
10.0%
0.0%
-10.0%
-20.0%
-30.0%
-40.0%
Tax
Benefit
Change 1998 M 1. pillar
50.0%
40.0%
30.0%
20.0%
10.0%
19
33
19
36
19
39
19
42
19
45
19
48
19
51
19
54
19
57
19
60
19
63
19
66
19
69
0.0%
-10.0%
-20.0%
-30.0%
Tax
Benefit
Change 1998 F 1. pillar
30.0%
20.0%
10.0%
19
38
19
40
19
42
19
44
19
46
19
48
19
50
19
52
19
54
19
56
19
58
19
60
19
62
19
64
19
66
19
68
19
70
0.0%
-10.0%
-20.0%
-30.0%
Tax
Benefit
Change 1998 M 1.-2. pillar
30.0%
20.0%
10.0%
19
33
19
36
19
39
19
42
19
45
19
48
19
51
19
54
19
57
19
60
19
63
19
66
19
69
0.0%
-10.0%
-20.0%
-30.0%
Tax
Benefit
Change 1998 F 1.-2. pillar
10.0%
5.0%
19
38
19
40
19
42
19
44
19
46
19
48
19
50
19
52
19
54
19
56
19
58
19
60
19
62
19
64
19
66
19
68
19
70
0.0%
-5.0%
-10.0%
-15.0%
-20.0%
-25.0%
-30.0%
Tax
Benefit
Change 2003 M 1. pillar
9.0%
8.0%
7.0%
6.0%
5.0%
Tax
4.0%
Benefit
3.0%
2.0%
1.0%
19
66
19
69
19
60
19
63
19
54
19
57
19
48
19
51
19
42
19
45
19
39
19
33
19
36
0.0%
Change 2003 F 1. pillar
9.0%
8.0%
7.0%
6.0%
5.0%
Tax
4.0%
Benefit
3.0%
2.0%
1.0%
19
38
19
40
19
42
19
44
19
46
19
48
19
50
19
52
19
54
19
56
19
58
19
60
19
62
19
64
19
66
19
68
19
70
0.0%
Change 2003 M 1.-2. pillar
10.0%
9.0%
8.0%
7.0%
6.0%
Tax
5.0%
Benefit
4.0%
3.0%
2.0%
1.0%
19
69
19
66
19
63
19
60
19
57
19
54
19
51
19
48
19
45
19
42
19
39
19
36
19
33
0.0%
Change 2003 F 1.-2. pillar
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
19
38
19
40
19
42
19
44
19
46
19
48
19
50
19
52
19
54
19
56
19
58
19
60
19
62
19
64
19
66
19
68
19
70
0.0%
Tax
Benefit
Conclusion
• Reform 1993 – affects negatively workers close to
retirement and positively younger ones
• Reform 1997 – the higher factor at calculation of initial
benefit and positive change in taxation is not enough to
compensate the effect of postponed retirement age.
On the other hand reform affects positively female
cohorts 1942-1944, because they can enjoy earlier
retirement age.
• Reform 1998 – affects negatively already retired persons
and for those who are close to retirement age. On the
other hand affects positively cohort 1951 or younger, no
matter when worker is in the pure 1. pillar or in the mixed
system. However workers in pure 1. pillar are better off.
• Reform 2003 – affects positively all cohorts. Cohorts
1933-1945 utilized the additional benefit gradually.
Younger cohorts utilized fully the 13th monthly benefit,
which means 8.3% higher pension benefit. In additionally
cohorts from 1951 in the mixed system has higher
benefit, because the contribution rate increased by 1%
Working on …
• Compute changes in SSW for various education level
and age group
• Compute IRR for various age group under existing
legislation for each reform
• Do analysis also for the Czech and Slovak social
security system
• Sensitivity analysis through key parameters