PENSIONS EMERGE AS MAJOR ELECTION ISSUE

C O N F I D E N T I A L SECTION 01 OF 02 BUDAPEST 000054 SIPDIS DEPARTMENT FOR EUR/CE JMOORE, EB/OMA, INR/EC, TREASURY FOR ERIC MEYER, JEFF BAKER, LARRY NORTON; COMMERCE FOR SSAVICH E.O. 12958: DECL: 01/28/2020 TAGS: EFIN ECON PREL HU SUBJECT: PENSIONS EMERGE AS MAJOR ELECTION ISSUE Classified By: Economic Officer Steve Weston for reasons 1.4 (b) and (d ). ¶1. (C) Summary. Pension reform is emerging as a major election issue as Socialist (MSzP) and Fidesz party leaders trade attacks in hopes of winning the votes of Hungary's estimated 2.7 million pensioners. As each party accuses the other's program of leaving pensioners worse off, both are trying to woo voters with escalating promises of additional benefits. Reminiscent of previous elections in which strategies to court voters by increasing government handouts resulted in double digit budget deficits, observers hope that this does not signal a return to "election politics as usual." With last year's fiscal responsibility law and Hungary's limited room for maneuver under Hungary's international stabilization program, campaign promises will be difficult to keep. End summary. FORMER FINANCE MINISTER IGNITES ISSUE ¶2. (SBU) As national election campaign begins, pensions are emerging as a key election issue, ignited by the recent statements of Fidesz vice president and former Finance Minister Mihaly Varga in a weekly magazine that his party supports the adoption of a "Swedish-style" pension model for Hungary. ¶3. (SBU) Many observers fear that the Swedish model, which combines a pay-as-you-go component with an individual pension account, would result in lower benefits for Hungarian pensioners and possibly require an increase in the retirement age. On the other hand, adopting such a model would help ensure the long term sustainability of the Hungarian pension system by eliminating costly state contributions and incorporating automatic adjustments to maintain balance in response to short-term economic and financial fluctuations. ¶4. (C) The Socialists immediately seized on Varga's comments, noting that in adopting such a model, Fidesz will cut pensions by 15 to 20 percen, and raise the retirement age to 70, which Socialist Party Chairwoman Ildiko Lendvai said would be "a disaster." Varga subsequently denied making the original comment, but the socialists see this issue as a possible chink in the Fidesz armor, and MSzP Prime Minister candidate Attila Mesterhazy told the Embassy on January 20 that pensions have become "a key campaign theme for the MSzP." He noted that his party intends to "keep the issue on the agenda" until the elections. ¶5. (SBU) The estimated 2.7 million people in Hungary collecting some form of retirement or disability pension constitute a significant proportion of the voting population. Although not a homogenous group, in previous elections pensioners tended to favor Socialist Party candidates. Winning their support is vital for Fidesz to ensure a large majority in Parliament and for MSzP to moderate its expected losses. Both parties have announced plans to send informational pamphlets and questionnaires on pension reform to hundreds of thousands of Hungarian pensioners. ¶6. (SBU) As each side continues to accuse the other's program of leaving pensioners worse off, the battle is increasingly being waged in the form of escalating promises of additional benefits. Recently, Socialist officials have promised to raise pensions levels, restore the previous system of indexation, and provide one-off payments to those in need whose next of kin has died. In addition to formally rejecting the Swedish model, Fidesz promises to "preserve the value of pensions," prevent the privatization of pension funds, and allow women to receive pension benefits after 40 years of service, regardless of age. ¶7. (SBU) The Bajnai crisis management government and the small center-right MDF party have largely stayed out of the debate, with the exception of the former maintaining that its 2009 reforms made sufficient changes to the pension system to ensure its sustainability for decades, and the latter openly endorsing the adoption of a Swedish-style system. HUNGARIAN PENSION SYSTEM AND 2009 REFORMS ¶8. (SBU) During the mid-2000s, the Hungarian pension system became increasingly indebted as benefits were expanded through the introduction of a so-called "13th month" pension payment, and through a change in the indexation system to allow pension increases based on both inflation and wage growth (the so-called "Swiss indexation" system). BUDAPEST 00000054 002 OF 002 ¶9. (SBU) In Hungary, both employees and employers pay into the state pension system. These contributions do not cover all of the benefits paid, however, and the government must subsidize an increasing share through the central budget. The GOH currently provides annual subsidies to the pension fund amounting to approximately $2.5 billion (HUF 500 billion). ¶10. (SBU) Additional strains on the system are foreseen due to Hungary's low employment rate, its declining birth rates, as well as an expected surge of retirees during the 2015-2020 and 2040-2045 periods due to earlier baby booms. The OECD reports that spending on public pensions as a share of GDP in Hungary remains above the average for OECD countries. ¶11. (SBU) Last year, the crisis management government of Prime Minister Bajnai enacted a number of pension reforms, including accelerating an increase in the retirement age, eliminating the "13th month" pension payment, and instituting an inflation-only indexation scheme. The most comprehensive reforms to the pension system in over a decade, these changes, if left intact, are helping reduce government expenditures and could help ensure the sustainablility of the system for several decades. COMMENT: THE CONSEQUENCES OF ONE-UPMANSHIP ¶12. (C) The current MSzP and Fidesz competition for pensioner votes and their escalating promises threatens to roll-back many of the reforms enacted just months ago by the Bajnai government. If fulfilled, these election promises could create new strains on the government budget and the Hungarian pension system. Observers remain cautiously optimistic, however, that last year's fiscal responsibilitylaw and the continued close scrutiny by the IMF and EU as part of the international stabilization program will help ensure the country's budget deficit does not reach prior election years' double digit levels. End comment. KOUNALAKIS