Marian L. Tupy is the founder and editor of HumanProgress.org and a senior fellow at the Cato Institute’s Center for Global Liberty and Prosperity. Dalibor Rohac is a senior fellow at the American Enterprise Institute
The problem with socialism, said Margaret Thatcher, is that you eventually run out of other people’s money. In Slovakia, the ex-communist Prime Minister Robert Fico is proving her right.
With a budget deficit of 5.3% of GDP and a soaring public debt, Fico is trying to seize the one pot of money he hasn’t touched yet: the private pension savings of 1.7 million Slovaks.
Slovakia’s pension system relies primarily on a combination of a pay-as-you-go (PAYG) “pillar,” funded by a 14% payroll tax, and a smaller 4% private investment component. As of now, Slovaks have accumulated savings of around €12 billion. And although only a small fraction of those enrolled have reached retirement age, private pensions are already saving around €70 million on PAYG benefits – a figure that is expected to climb to €190 million by 2029.
In a small economy like Slovakia’s, that is real money. Yet Fico has been on a quest to destroy the private “pillar” since its inception in 2004. Initially, the two pension “pillars” were designed to be equal in size – until Fico cut the private pension contributions from 9% to 4%. In 2013 he also mandated a shift in the default portfolio away from equities toward government bonds, at a time when stock prices were hitting the floor.
The dramatic reduction in the rate of return (from around 8% annually to less than 2%) that ensued was a result of something more sinister than just Fico’s thoughtlessness. It was a manoeuvre aimed at eroding the political system for a system of pensions that he, as a politician, can’t fully control and manipulate to his advantage.
The centre-right government that came to power in 2020 has reversed that change – but now Fico is keen to gut the system altogether to plug a hole in Slovakia’s public finances, which he has overseen for the better half of the past 20 years.
Some of his ideological allies did the same thing. During the Great Recession, Viktor Orbán seized some $14 billion in private pension assets. In the short term, Hungary’s budget deficit did go down. Yet today debt is over 70% of the country’s GDP and in real per capita terms, Hungary has become the poorest economy in the EU – an extraordinary reversal of fortunes relative to the early success of its transition away from communism.
Slovakia’s story has been similarly remarkable. Once called “Tatra Tiger,” the Slovak economy is expected to grow in real terms by a meagre 1.9% this year. Fueled by the fourth-highest budget deficit in the EU, public debt nearly doubled between 2020 and today, from €45 billion to over €80 billion and is expected to rise above 70% of GDP by the end of the decade.
The International Monetary Fund urges Slovakia to cut an additional 3.1% of GDP in spending cuts over the next three years. Instead, Fico is raiding people’s pensions. Moreover, his government has already unleashed a flurry of new taxes – a higher VAT rate, a hike in the corporate tax rate (now the highest among Visegrad Four countries), and a new financial transaction tax.
Could such measures work, temporarily, to reduce the deficit? Maybe. However, the combination of higher taxes with an attack against people’s property rights is not the recipe for economic success – quite the contrary. Slovakia already suffers from a brain drain and is already being affected by the ongoing crisis of German manufacturing. Yet, Fico’s government displays little interest in improving Slovakia’s legal institutions, notoriously corruption-ridden, nor is it pursuing structural reforms that could improve the country’s competitiveness.
There is a European and international dimension to all that. In their influential reports on the EU’s competitiveness and the single market, Mario Draghi and Enrico Letta emphasised the importance of deepening the integration of European capital markets, so that savings of Slovak workers, for example, do not stay in Slovakia but flow organically to investment opportunities that offer the highest rate of return.
Slovakia may be a small player, but a European government that arbitrarily seizes the savings of its citizens sets a very bad precedent for an effort to scale up Europe’s venture capital ecosystem and funding available to promising European companies, which currently have every incentive to relocate to the United States.
Decline is a choice, as Charles Krauthammer was fond of saying. The choice facing the Slovak voting public in the coming years will be particularly stark: one between delivering on the promise of freedom and prosperity, which brought Slovaks to the streets in 1989, and a continuing erosion of their foundations by a bloated, arrogant, and incompetent state.
