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DE RUEHUP #0054/01 0330907
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R 020907Z FEB 10
FM AMEMBASSY BUDAPEST
TO RUEHC/SECSTATE WASHDC 4862
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

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