Hungarian pensioners at risk every year - a comprehensive reform of the pension system is needed

According to the Pension Act, pensioners can receive an additional pension increase if the annual inflation rate estimated on the basis of the inflation data of the Hungarian Central Statistical Office (KSH) for the months of January and August exceeds the percentage of the pension increase implemented in January by at least one percentage point. In such cases, pensioners will receive the difference in November, backdated to January, i.e. the November pension will already be paid in an increased amount and the 11-month increase for the first 10 months of the year and the 13th month pension will be paid in one lump sum together with the November pension.

According to the KSH flash estimate for August, general inflation was 16.4% and pensioner inflation 17.2%. In the first eight months of this year, inflation was 22% and 23.3% respectively.

The government must estimate the annual inflation expected for 2023 on the basis of these measures before the end of September. If, according to this estimate, the annual rate of either general or pensioner inflation is higher than 15%, the (larger) difference will have to be covered by the additional pension adjustment in November. The exact rate and the list of benefit types to be increased will be set out in a government decree to be issued in October (21 October 2020, 6 October 2021 and 5 October 2022).

What is the government's estimate of annual inflation expected by the end of September? In order to answer this question, it is necessary to know the figures from the KSH for the first eight months of the year:

On the other hand, the answer also needs to take into account the government's inflation forecast for the last four months of the year (as recently mentioned by Minister of Economic Development Márton Nagy at the Tranzit festival):

Of course, these preliminary estimates are not binding on the government, but presumably a pension increase correction of at least 2.4% and up to 3.6% can be expected, which is also required to maintain the credibility of government communication, which stresses the protection of pensioners at every possible opportunity.

• 2.4% increase cca. HUF 132 billion, a 3.6% increase of cca. HUF 198 billion in additional budgetary coverage. The additional increase will also change next year's budget, as the 6% pension increase planned for January 2024 will have to be implemented on higher starting pensions.
• With an increase of 2.4%, the total annual pension increase would be 17.7% (1.15 x 1.024 = 1.177), and with an increase of 3.6%, the total annual increase would be 19.1% (1.15 x 1.036 = 1.191), i.e. the January increase and the additional November increase would together offset this amount of annual inflation.
• The current average pension of HUF 208,500 would increase to HUF 213,500 in the case of a 2.4% increase, and to HUF 216,000 in the case of a 3.6% increase. The increased November pension would be accompanied by a lump sum payment of 11 months of the difference (for the first 10 months of the year and the 13th month of the pension), which would amount to HUF 55,000 in the case of a 2.4% increase and HUF 82,500 in the case of a 3.6% increase.
• Of course, these amounts are somewhat smaller when compared to the current median pension of 186,000 HUF (one million pensioners receive less than this, and one million more). And those pensioners whose benefits are less than HUF 100,000 a month (there are still more than 200,000) can expect a very small increase in their pensions.

In any case, the actual answer to the question of the level of the retroactive correction pension increase for a quarter of Hungary's population, nearly two and a half million people, will only be a few weeks away. In addition to the two million pensioners, half a million other beneficiaries are also entitled to a supplementary pension increase, so they are also waiting on the edge of their seats to see when and how the government will decide how to alleviate their long-term distress caused by inflation.

Will the additional pension increase close the gap between pensions and net earnings? The short answer is no.

The pension in Hungary depends on two main factors: the length of service that can be taken into account for pension entitlement and the amount of the calculated average net monthly career earnings on which the pension is based.

The average earnings on which pensions are based are calculated by netting the annual wages earned since 1988 according to the contribution and tax rules applicable for that year, and then adjusting these calculated net annual earnings by the valorisation factor for that year to the average net national economy earnings level of the year preceding the year of retirement as an earnings reference, resulting in the calculated average net monthly career earnings. This amount is multiplied by a pension multiplier based on the length of service in whole years, according to the pension scale, to obtain the pension amount.

As the national average net earnings level in the year before the pension is awarded is the benchmark, a pension claimant who applied for a pension in a later year could be significantly better off in each year between 2015 and 2021. The significance of this is so huge that the year in which a claimant applied for a pension has become virtually the same factor as the one on which the pension is otherwise based (number of years of service, career average earnings).

The full phasing back of the 13th month pension from 2022 and the effects of runaway and still high inflation in 2022 mean that this correlation is currently less pronounced, but the valorisation applied to the calculation of pensions is adjusted to the nominal increase in average net national income, and the yearly maintenance of pensions already set, i.e. pension increases that are solely indexed to inflation, have not eliminated the relative depreciation of pensions, and in fact, as inflation eases, the gap could be sharply widened again next year, despite the additional pension increase in November and the pension increase next January.

Due to valorisation, the amount of the pension is still adjusted to the average earnings of the national economy in the year of its establishment, but from the year after retirement onwards the relative purchasing power of the pension starts to decline, as every year when the growth rate of the national average net earnings is higher than the inflation rate, pensioners slide down the relative poverty slide (one sign of this is that the average pension as a percentage of average net earnings is getting smaller, currently 55%).If inflation is indeed at or below 6% in 2024, while average national earnings continue to grow at double-digit rates, the relative impoverishment of pensioners could accelerate again.

This process can only be slowed down if the pension increase procedure takes into account not only the rate of inflation but also the growth in earnings in each year in which the growth in earnings exceeds the rate of inflation. The pension increase should also slow down the unfairness for those with a previously established pension by increasing pensions that have slid further down the poverty slide of previous years by a valorisation adjustment depending on the year of pension establishment. A system of fair pension increases should also slow down the fragmentation of the pensioner population.

Overall, a thoughtful reform of the pension increase based on mixed indexation is necessary but not sufficient, because a valorisation correction according to the year of pension establishment and a solidarity correction based on the amount of the pension should be incorporated into the future new procedure for the increase.

The pension increase procedure is currently still based on the following principles:

• the increase depends only on inflation, no other factors (such as national gross or net earnings growth) are taken into account,
• the regular increase due in January of each year must be based on the inflation rate forecast in the Budget Act, and if the inflation rate for the whole year, based on the data up to August, is higher than this, the increase must be corrected ex-post in November (i.e. when the annual inflation rate is still only an estimate),
• if the government deems it necessary, an extraordinary adjustment can be made in early to mid-summer (also according to an estimated inflation rate), but this has not been done this year, even though inflation in the first half of the year has eaten up the extra income from the 15% increase in January and the 13th month pension in February,  
• the estimate of the annual rate may not adequately reflect actual inflation in the months of September to December, and if actual inflation ends up exceeding the annual inflation estimated on the basis of the January to August data used to determine the November correction increase, this loss is no longer compensated to pensioners, i.e. each year, all pensioners are likely to have limited protection against a third of a year's (September to December) inflation,
• benefits must be increased at a uniform percentage rate, regardless of their size, so that the poor pensioner becomes relatively poorer and the rich pensioner relatively richer - while all of them are placed on differently steep poverty slides once their pensions are determined, precisely because of the purely inflation-linked nature of the pension increase,
• the pension increase does not compensate for the unfairly declining value of previously determined pensions, nor for the pensions of pensioners who have slipped into the lowest income decile (no valorisation or solidarity increase correction, no banded pension increase),
• the increase should be based on the composition of the pensioner's consumer basket two years before the current year, if pensioner inflation would be higher than the general increase in consumer prices, except that in exceptional situations the consumer basket two years before may differ substantially from the consumer basket of the current year,
• pensions established in the current year can only be increased from the year following the year of establishment, so that fresh pensions are unprotected from runaway inflation in the year of establishment.

The essence of the current increase paradigm is that pensions have to be increased according to an inflation estimate set months in advance in the Budget Act, determined by economic policy interests, and that this increase can only be compensated for ex-post, and then only according to a new inflation estimate.

This serves the interests of the state, not pensioners.

This is because the rate of the inflation increase, both for the January primary increase and for the corrective increases, is based on government estimates (and not on settled facts), and it shifts the entire risk burden to pensioners, who lend the increase they are entitled to to the state interest-free for many months, and even forgo part or all of the additional increase for the last four months of the year in favour of the state. This is illustrated by the inflation and pension increase figures for 2022: the total increase in pensions was 14% in three steps, while the annual rate of pensioner inflation was 15.2%. The missing 1.2 percentage points were not reimbursed to pensioners by the state. This risk remains every year, including this year, until a meaningful reform of the pension increase procedure is introduced.

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