Hungary signs up forCanada-style pension plan

The Ottawa Citizen
Tony Deutsch
commutes between
Montreal and
Budapest.

On a walk through a smallpark in Budapest, Tony Deutsch points to an unusual memorial, one the authoritieswant to remove.

It's a mock prison cell toppedwith barbed wire. Inside, a sculpted figure sits in despair. The figurefaces a mirrored wall in which you see your own reflection. The inscriptionis to the local people "whose lives were ruined" during the 1944-90Soviet era.

Mr. Deutsch sees his own reflection.But he wasn't here for most of those years. He was in Canada. As for theruin, his job now is to help overcome it.

His specialty is pensionsand although most Hungarians don't know it, he deserves a lot of credit-- or blame, depending on how it turns out -- for their new pension system.

The 61-year-old McGill economicsprofessor is one of the three people behind the Canadian-styled Hungarianpension system rising from the ashes of the old pay-as-you-go Soviet systemthat was common to all former Warsaw Pact countries.

Like other Central and EasternEuropean economies, Hungary has postponed hard-nosed social security reforms.It takes an extra dose of political courage in countries where the massesare accustomed to low-cost housing, free health care and early retirements(average age 54) with guaranteed government pensions.

 "I don't know whetherI'll be banished from the country or they'll build a monument to me,"Mr. Deutsch quips, only half-jokingly.

 Nearly three in 10 Hungarianscollect a pension, making reform a tense business.

 "There were subrosa threats that the masses would be mobilized," Mr. Deutsch says."In fact, they don't have a case with which they could get peopleout on the streets. We're not doing anybody any harm and the prime minister'smotto on this reform that 'no one is to lose' is sufficiently widely believed."

 Hungary is regardedby experts as a gem among the economies in transition from communism tocapitalism. It has privatized all housing, most land, most industry andmuch of the infrastructure.

It attracts more private directforeign investment than any other transition country in the region.

 One of the few sorespots singled out by international watchdogs is delayed reform of socialsecurity, a huge burden on state budgets. Under the old system, pensionerswere unhappy because benefits were too low. Employers were unhappy becausethe payroll tax was too high. The government was unhappy because thereare 2.9 million pensioners in a population of 10 million and a labour forceof only 4.5 million. Add about 700,000 unemployed and "the dependencyratio is horrendous," says Mr. Deutsch.

 Instead of draininggovernment funds to cover a pension plan with no assets, Hungary will diverta third of pension contributions into individual accounts for a higherreturn. The other two-thirds will go straight into government coffers.

 Mr. Deutsch tried tostay out of the thick of the political fray as the seven-volume pensionlaws hit the legislature this summer. The 500 proposed amendments threatenedheartburn, if not defeat. The key law was passed by a wide margin in mid-July,and now lawmakers must determine who must divert a third of their contributions,who can choose to opt in or stay out, and who must stick with the old system.It depends on age and likely on retirement date. The new system is to comeinto effect Jan. 1, 1998.

 He says his backroomwork has been "a thrill."

"I'm very lucky. Mosteconomists get to theorize about what other people have done. I'm a bitlike a doctor where I can practise clinical economics."

 Mr. Deutsch has beeninvolved on the fringes of the pension system in Hungary for years andhe knows people who were alarmed about the hollowness of the system duringthe Communist era but had to pursue their research "under guises suchas railroad research because there could be no public admission of a problem."

 The problem was thatthe Hungarian death rate overcame the birth rate years ago, and worry setin about how a shrinking working population could support a growing retirementpopulation.

 When Gyula Horn, thenHungary's foreign minister and now prime minister, was in Montreal at a1990 conference, he wound up at a reception at Mr. Deutsch's Westmounthome. During his visit he "made a general plea to all Hungarians,'Look, we're in a mess, we want to change, help us.' "

 A year later, Mr. Deutschwas invited to Hungary to speak to ecision-makers about the pension system.The Canadian embassy offered backing. His advice has been financed by CanadianInternational Development Agency programs helping former Warsaw Pact countriesmake the transition to capitalism.

 Although the Hungariangovernment wants to portray the pension reform as an indigenous achievement,Mr. Deutsch has received a Hungarian national honour for his work. Anda senior Hungarian civil servant, Tibor Parnaczky, says Mr. Deutsch's adviceis good not just because of his familiarity with pension systems aroundthe world but "his ability to translate it to the Hungarian situation."

 "Others say, 'Oursystem works, why don't you just copy it?' but he understands the Hungarianenvironment and knows that we can't do it all at once. We have to designa flexible and gradual systemthat can develop over time. We had to speakof things which didn't exist before, and people fear the unknown."

 Mr. Deutsch commutesbetween Montreal and Budapest, the city where he was born and lived until1950 when his family bribed its way out of the country by rail. He regularlyeats at a sidewalk cafe across from the apartment block where his Austrian-borngrandmother lived. He's the kind of man who orders such foods as liverand lung. He travels by bus and tram, soaking in the memories of childhooden route to the cubby-hole offices of the Hungarian Finance Ministry.

 The overhaul began in1993 with the establishment of private-sector pensions to which a half-millionHungarians quickly signed up and which they now are joining at a rate of20,000 per month. The original model for the private plan was so similarto McGill University's pension plan that Mr. Deutsch was embarrassed.

People here were afraid that their money would be stolen by putting it in private hands. No such thinghas happened, of course, and Mr. Deutsch is proud of the number of Hungarianssigning up to this "very Canadian thing."

Juliet O'Neill