The Economist's Ex-communist Europe
Pensions in Hungary and Romania
Get rich quick
Dec 2nd 2010 by T.E. | BUDAPEST
AS HUNGARY pushes forward with plans to encourage people to give their pension savings to the government, similarly cash-strapped Romania is experimenting with equally inventive ways of conjuring money up out of nowhere.
At the recent annual general meeting of Romgaz, Romania's largest gas producer, the government, which owns 85% of the company, voted for it to donate 400m lei ($122m) to the state budget to help the country meet its budget-deficit targets.
The other 15% of the company is in the hands of Fondul Proprietatea, an investment fund set up in 2005 to recompense those who had property expropriated under Romania’s communist regime. The fund was endowed with holdings in state companies, and victims were given shares in it.
The irony of the government extracting assets from a fund designed to compensate victims of expropriation is not lost on Mark Mobius, head of the emerging-markets arm of Franklin Templeton, a fund manager that administers Fondul Proprietatea, and that issuing the Romanian government. Voting dividends to all shareholders would have been fine, Mr Mobius says, but transferring a lump sum to the treasury is going too far.
“This is short-termism,” he says. “The government is up against the wall with its state budget, and they aren’t aware of the long-term impact of what they’re doing.”
The €3.5 billion ($4.6 billion) fund is scheduled to float on the Bucharest stock exchange next year, making it easier for people who have been awarded shares to realise their returns. “If people get the idea that assets can be confiscated at will, it’s going to hit asset values.”
Unlike Hungary, Romania is still sticking to an IMF-led austerity programme. Cuts of 25% to public-sector wages, benefit drops and a 5% VAT hike have not made life easy for the government. Though plans to raid pension funds periodically surface, the IMF has vetoed them, as it did in Hungary’s case before the country turned its back on the multilateral lender.
“This is a problem we are facing in eastern Europe, because they desperately need the cash,” says Mr Mobius. “At least in the case of Hungary, they are going through the motions of proper procedure.”
But the details of Hungary’s emergency cash-raising plan—under which 3m pension savers are being asked to give some €10 billion of their pension assets to the government if they want to receive a state pension when they retire—might lead Mr Mobius to question this. Although the government says those who do not hand over their cash will lose their state pension entitlement, two opposition parties have stated that they will revisit this decision if they win power.
For many savers, the choice is between the certainty of losing their savings if they return to the state pension system, and the risk that a future government won’t change its mind over the decades until their retirement. Staying private is looking like an increasingly good bet.
But there’s a snag. According to the legislation just passed, those who want to keep their savings have to make the declaration in person at one of the country’s 33 pension administration offices before January 31st. According to one calculation, if just one third of existing fund members choose to stay private, those 33 customer services centres would have to process an unrealistic one client every 30 seconds for the whole of January.
People wishing to exercise what the government has called their “freedom to choose” will have to take a day off work, travel to an office that may be in another town, and spend hours queuing outside in the middle of an icy central European winter.