Time has come for Hungarian pensioners to fall into poverty

Answering a journalist's question at the latest Government Info, Minister leading the Prime Minister's Office Gergely Gulyás said that if the amount of money lost in a given year is higher than the pension increase in January, the difference will have to be paid to pensioners. This requires an accurate estimate of what the annual inflation rate will be. "As we move forward in the year, it will be possible to see whether the cash outflow will actually be higher than planned, or whether the radical and rapid reduction in inflation will eventually bring the figures into line. We don't see that yet, but the government will decide in due course. I assume it will be in September at the latest," said Gergely Gulyás.

This means that there will certainly not be an extraordinary mid-year pension increase in the summer (as was the case in June 2021 and July 2022), and it is by no means certain that there will be a pension increase correction in November, since the annual estimated inflation rate calculated by the government in September based on the eight months of January-August may not be higher than 15% on average per year. In this case, however, the annual inflation was covered by the 15% pension increase in January, so there will be no additional increase.

According to the Central Statistical Office's (KSH) flash inflation report published on 7 July 2023, inflation in June (compared to June 2022) was 20.1%, while pensioner inflation was still higher at 21.2%. So, after 25.7% in January, 25.4% in February, 25.2% in March, 24.0% in April and 21.5% in May, consumer price inflation is now stuck above 20% for the sixth month this year, while pensioner inflation is even more dismal, as after the figures

• 27,4% for January,
• 26,9% for February,
• 26,7% for March
• 25,3% for April,
• 22,9% for May
• it remained above 21% in June too.

If, on the basis of this data and the July and August inflation reports, the government's estimate in September that annual general or pensioner inflation (whichever is higher under the Pensions Act) will be 15% or less is considered plausible, then

whatever mathematical proof is sought, credibility with the pensioner community could be severely damaged.

It is particularly difficult for pensioners to agree with the government's position that the state will preserve the purchasing value of pensions through thick and thin, even this year, if Hungarian inflation is compared with that in Europe, where the price increase is by far the highest, significantly higher even than the price erosion in Central and Eastern European countries.

The vulnerability of the Hungarian pension system is particularly striking in light of these inflation figures.

All developed pension systems apply to a greater or lesser extent the principle of solidarity, i.e. regulated transfers of income during the annual renewal of pensions, to ensure that the financial gap between members of the pensioner population, which is visible at the time of pension establishment and is the result of different pension entitlements acquired during their lifetime (different length of service, widely divergent earnings), does not widen further and ensures the basic equity of pension systems based on the principle of actuarial fairness.Under the equivalence principle governing occupational pensions, it is not considered unfair if the pension is higher for someone who has paid higher contributions for a longer period during their working life. However, the situation is different as regards the maintenance of pensions already established, i.e. regular and exceptional increases, and additional benefits for the retired population, such as the 13th month pension. In these areas, the unrestricted application of the equivalence principle inevitably leads to an accelerating financial fragmentation of the members of the pensioner population:

each time, an increase or additional benefit of the same percentage for all, depending on the amount of their own pension, widens the absolute gap between pensioners.

Not to mention that, despite the increases and the 13th month pension, pensioners are feeling poorer month by month in the persistent shadow of brutal inflation, as the pension increases, which are much lower than the perceived inflation, have to be spent to a greater extent on food, which is rising at twice the rate of general inflation (three times in the first quarter).

A nyugdíjemelés legnagyobb problémája a magas inflációs környezetben az, hogy a januári kötelező emelés korrekcióira csak késleltetve, több hónapos csúszással kerül sor (2022-ben a januári emelés után júliusban jött az első korrekció, és csak novemberben a második kiegészítés, idén pedig eddig csak a januári 15%-os emelés történt meg). A problémát súlyosbítja, ha a januári emelés mértékét jellemzően alultervezik a költségvetésben, mint tavaly (5%) vagy jövőre (6%), ezzel a nyugdíjasokat valóban arra kényszerítik, hogy hónapokon át hitelezzenek a magyar költségvetésnek, amely csak utólag utalja majd nekik az őket megillető emelési különbözetet - ami az év utolsó hónapjaira ráadásul csak részlegesen kárpótolja őket.

The biggest problem with pension increases in a high inflation environment is that the corrections to the January mandatory increase are delayed by several months (in 2022, the first correction after the January increase came in July, and the second supplement only in November, and so far this year only the January 15% increase has been made). To compound the problem, if the January increase is typically under-budgeted, as it was last year (5%) or next year (6%), pensioners are effectively forced to borrow for months from the Hungarian budget, which will only pay them the difference in the increase afterwards - and only partially compensate them for the last months of the year.

Last year's 14% overall increase was offset by pensioner inflation of 15.2%, so the state owes pensioners a 1.2% point increase - roughly HUF 60 billion - but will never pay it as this is not required by the Pensions Act.

The situation is exacerbated each year by the regulatory circumstance that the November pension increase is determined according to the inflation figures for the first eight months of the year, which of course cannot fully reflect the pension-reducing effect of annual inflation. This inflationary loss to pensioners due to the method of pension increases could only be recouped if the rate were taken into account in the following January's pension increase - if, for example, pensions were increased by 16.2% this January instead of 15%, making up for last year's 1.2% increase shortfall.With such high inflation, the current frequency of pension increases (a January increase followed by a November correction and possibly a summer top-up, which was not made this year) is simply inappropriate for the mid-year maintenance of the purchasing power of pensions, and it would be advisable to move to at least a regular quarterly pension increase. Once the exceptional times have passed (if they ever do), the reform could preserve the tried and tested elements of the system, while adding some modern technique of mixed indexation to take account of net national economic earnings growth.

However, a fair pension increase must not only compensate for tightening inflation, it must also address the unfairness to those with previously established pensions, which are therefore increasingly shrinking in value. It would therefore be advisable to incorporate into the pension increase system as soon as possible a corrective indexation to ensure a compensatory increase in pensions that have slid further down the poverty slide of previous years, i.e. in line with the current value of the valorisation multipliers.

And even this is not enough for a truly equitable pension increase, since the pension increase system must address not only the continuing gap with the average net national economy income, but also the fragmentation of the pensioner population, which can only be slowed down by the 13th month pension and differentiated pension increases, for example through the banding method (whereby the smaller pensioner can receive a higher proportion or a higher amount of pension increase).

This year's pension increase adjustment will be decided by the government on the basis of the data from the KSH - if the annual inflation rate would be higher than 15% at the latest according to the August report (expected on 8 September). The pension increase will not be based on the analysts' consensus rate (currently 18.1%), nor on the latest National Bank of Hungary (MNB) analysis (which puts this year's annual inflation at between 16.5% and 18.5%), but on the government's September estimate based on the August KSH inflation report.In any case, an increase of a single percentage point could cost between HUF 50 and 55 billion, so an increase of at least 3%, which most pensioners' organisations consider justified in the light of the data so far, could lead to an additional expenditure of HUF 150-165 billion, for which it is not certain that the funds can be (easily) found this year.

An increase correction in November would also change the budget plans for 2024, as the 6% pension increase in January 2024 would have to be implemented on higher December pensions (and of course next year's inflation rate, which was planned at 6% in July this year, could change at any time due to the constraints of the actual economic developments).

Pension law provisions on regular pension increases

It is worth being aware of the legal provisions, because the news reports often refer to the legislation in an inaccurate and biased way. According to the law, pensions set before 1 January of the year in question must be increased in the month of January of each year after the calendar year in which they were set, by the amount corresponding to the increase in consumer prices planned for the year of the increase. The planned consumer price increase for the year in question is set by the Central Budget Act.

According to this provision,

• pensions can only be increased from the year following the year in which they were first determined (therefore, inflation in the current year can burn through pensions determined during the year, so it is worth paying particular attention to the timing of pension claims in this respect),
• and the first increase must be made in line with the inflation rate planned in the budget law for the year following the year of assessment (i.e. the rate estimated by the government) (for example, this rate is 6% in the budget law for 2024, so that the rate for 2024 is 6%. This rule precludes the possibility of any pension increase that may have been foregone after the November correction of the previous year being applied retroactively, as in the case of the 1.2% real terms depreciation for 2022).

According to the statutory provision on supplementary pension increases, if the expected rate of increase in consumer prices in the current year exceeds the January increase by at least one percentage point, a supplementary pension increase is made in November, with retroactive effect to 1 January (if the expected annual rate of inflation would exceed the January increase by less than one percentage point, the difference is paid in a lump sum). For this supplementary pension increase, the expected rate of increase in the consumer prices of pensioners, based on actual data for the first eight months of the year in question, is taken into account if it exceeds the expected rate of increase in consumer prices.

According to this provision, the supplementary pension increase in November is subject to a new estimate, since it depends on the government's assessment of the annual inflation rate in September, whether (and to what extent) it will be made.

If the rate of pensioner inflation is expected to be higher than the general inflation rate - for which there is a specific provision in the Pensions Act, stipulating that the "expected rate of increase in the consumer price of pensioners' goods" based on the actual data for the first eight months between January and August should be taken into account - the increase should be made in line with the higher pensioner inflation rate. The KSH's flash inflation reports therefore also include separately the pensioner consumer price index for the same month of the previous year.Under the Pensions Act, Parliament authorises the Government to take additional measures if the necessary conditions are met, in the light of actual or expected macroeconomic developments and data. On the basis of this mandate, the government increased pensions in June 2021 and July 2022 as an extraordinary summer mid-year increase correction - but did not increase pensions in June or July this year.

As it is clear to see, the government is not obliged to make a summer increase correction under the Pensions Act.

Nevertheless, pensioners may be disappointed that, despite the practice of the previous two years, no such corrective increase has been made in a year of unchanged brutal - albeit indeed falling - inflation.

The Pensions Act also provides that legislation may order an increase in other cash benefits under this scheme. At present, nearly two dozen benefits (disability or rehabilitation benefits, early retirement benefits, service pension, and so on) have to be increased in line with the pension increase.

The pensioner consumer basket
Since the adjustment would still have to be made in November even if the general consumer price increase did not exceed (or exceeded by less than) 15%, but the increase in the pensioner basket of consumer prices would exceed (or exceed by more than) 15%, it is important to know how the measurement of pensioner inflation differs from the measurement of the general consumer price change.
Like the general consumer price index, the consumer price index for pensioners is a national average indicator, which is calculated by the KSH without special items not related to actual consumption, i.e. the so-called imputed rent (which is not part of the consumer price index from 2012) and items related to childcare.
The latter include consumption goods and services such as school, nursery and crèche meals, children's clothing, textbooks, school supplies, stationery and educational services. In 2023, the retired consumer price index will be calculated using the consumption structure of retired persons in 2021, which, as in the calculation of the weighting ratios for the population as a whole, will take into account the preliminary national accounts data already available for the first three quarters of 2022.
The KSH will therefore use the 2021 pensioner consumption structure for the calculation of the 2023 pensioner consumer price index - this two-year delay is hardly understandable, as all billing data is now available online to the National Tax and Customs Office (NAV), so they could use up-to-date data for statistical analysis. The procedure may also be a cause for concern in light of the pandemic and in particular the war in Ukraine, as the pension consumption structure may have changed radically compared to the pre-pandemic and pre-war situation.
The share of medicines, food and household energy in the pensioner basket is also a few percentage points higher, while the share of alcoholic beverages, tobacco, clothing, consumer durables and services is slightly lower than in the general consumer price index. Of course, in the personal experience of pensioners, inflation as measured by official statistics is always below the price increases they actually perceive, especially because of the slowly diminishing impact of the food and energy price explosion.

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