Hungarian pensioners on a poverty slide with no way out for now

According to official communications, pensioners were very well off last year, as pensions were increased by 6%, while real annual inflation was only 3.7%, so the real value of pensions increased by 2.3%. According to a series of government announcements, all is well with pensions this year, with another annual pension increase of 3.2% in January and the 13th month's pension arriving again in February.

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If we ignore the fact that

• the Hungarian state spends very little on pensioners' pensions as a share of GDP (5.45 percentage points less than the EU average of 12.9% in 2025, or just 7.45% of planned nominal GDP, still ranking 25th out of 27 Member States), the Hungarian government will have to pay a very low level of pensioners' pensions.
• As a result, Hungarian old-age benefits are among the lowest in the OECD,
• so it is no coincidence that one in three pensioners is at risk of poverty and one in six of pensioners is at risk of extreme poverty (in 2024, 702,000 people had a pension of less than HUF 160,000 - the poverty threshold could be as low as HUF 170,000, the Hungarian Central Statistical Office [KSH] has not yet released the actual data - and 316,000 people had a pension of less than HUF 120,000 - the extreme poverty threshold may be drawn at two-thirds of the poverty threshold, which could be HUF 112,000 in 2024 and 118,000 in 2025).
• In this context, the proportion of pensioners at risk of poverty or social exclusion increased from 21.3% in 2022 to 28.6% in 2023,
• while the relative income poverty rate for people aged 65 and over increased from 14.5% in 2022 to 24.6% in 2023,
• meaning that overall the situation worsened in 2023 compared to 2022, from 1, 87 million people (19.7 % of the total population) were at risk of poverty or social exclusion, a risk from which the pensioner population could not escape, and the situation has not improved in 2024 according to the data available so far -

in short, if we ignore all this, the pension situation is indeed stable, sustainable and no reform is needed.

Obviously, a country's pension system cannot be in a better position than its economy, and deteriorating economic indicators will inevitably have an impact on the pension system. Especially if the safeguards built into the pension system are weak.

As a result, the greatest risk in 2025 is the continued relative impoverishment of pensioners - while the risk of absolute impoverishment is also a growing risk for a growing share of the pensioner population, as the figures cited above show.

Relative poverty slide

The pensioner poverty relative to the active working population is the result of different principles and procedures for pension setting and pension increases.

The amount of the Hungarian old-age pension depends on two factors:

• the percentage of the pension multiplier according to the pension scale, which depends on the total number of years of recognised service,
• and the calculated average monthly net career earnings, calculated on the basis of the earnings from 1 January 1988 until the starting date of the pension assessment, which are the basis for pension contributions.

The amount of the pension therefore depends on both the length of service and the average net lifetime earnings. The amount of average net career earnings is significantly influenced by the year of pension claim due to the impact of the weighting factors which play a key role in pension calculation.

As a result of the current procedure for pension setting, the value of a newly determined pension reflects the nominal increase in the national average net earnings in the year preceding the year of pension setting through valorisation, so a newly determined pension is more or less adjusted to the wage level. Since earnings in the year preceding the year of retirement must be adjusted to the earnings level of the year preceding the year of retirement, the phenomenon that the year of pension claim has a decisive influence on the amount of the pension is becoming increasingly prevalent in recent years and will be further reinforced in 2025:

the later the year of pension claim, the better the beneficiary can be rewarded, even for very similar careers.

However, a pension increase procedure that is solely indexed to inflation inevitably leads to a disconnection from the active labour force - this is the effect of the relative pensioner impoverishment slide, while also contributing to the internal disconnection of the pensioner population (due to the cumulative depreciation of older pensions compared to later pensions).

This problem is so pressing that it was even a priority for the OECD experts invited by the government to prepare a possible Hungarian pension reform (although the government had already brushed aside the idea of reform at the end of last year - of course, the problems still remain).

Surprisingly, the OECD approached the relative impoverishment anomaly not from the point of view of pension increases but from the point of view of pension setting, and proposed to reduce the size of the valorisation multipliers by a kind of ex-ante mixed indexation or by linking them to changes in the contribution base. As a result, the calculated net average lifetime earnings on which the newly determined pensions are based could only partially follow the nominal growth rate of Hungarian national average net earnings (it currently follows it fully), so that the amount of newly determined pensions could be lower, while the method of pension increase would not change.

This proposal would not prevent the depreciation of pensions already established, but would reduce the amount of pensions newly established.

It would reduce the relative poverty of pensioners by reducing the initial situation (making the poverty slide less steep), but it would increase the risk of absolute poverty for pensioners as a consequence.

The OECD proposal would not solve the pressing problem, but rather add to it, as it cannot be solved without reforming the pension reform procedure, which would need to include at least three changes:

• the reintroduction of mixed indexation (taking into account, in addition to inflation, the rate of increase in national average net earnings, in nominal or real terms, which could then have a positive impact on the amount of the pension),
• the introduction of a valorisation adjustment to mitigate the cumulative relative depreciation of previously determined pensions, and
• the introduction of a solidarity increase correction or a graduated increase scheme to improve the situation of pensioners whose pensions have fallen below the current extreme poverty threshold (40% of median equivalised income).

But these were not addressed in the OECD proposal, perhaps because they were aware of the hidden political arguments for leaving the pension increase procedure unchanged. Indeed, the implicit public debt arising from the future state pension promise is reduced by the current Hungarian regime of regular pension increases, whereby pensions are increased only by the rate of consumer price increases - since this allows the value of pensions to fall relatively every year relative to the faster growing average wage in the national economy, which could reduce the implicit debt significantly overall:

thus, a radical change in the pension increase procedure seems a hopeless lobbying task.

The price of this implicit debt reduction, of course, is the aforementioned price of putting Hungarian pensioners, from the moment their pensions are determined, on a relative poverty slide, the slope of which is a function of the increase in the nominal average net national wage and the increase in inflation. In the context of runaway inflation, the indexation of pension increases to inflation in 2022 and 2023 was apparently beneficial for pensioners, but the built-in unfairness of the pension increase and its ex-post correction mechanism prevented any meaningful improvement in the situation of those concerned.

The only relief came with the partial introduction of the 13th month pension in 2021 and the full introduction from 2022, but even this cannot fully solve the problem, while it has created a huge new problem: how can an extra benefit (HUF 490 billion in 2025 for pensions alone) be financed in the long term, with no contribution cover?

Pension hikes in the rear-view mirror

Since 2012, pensions have been increased in January of each year in line with the annual average rise in consumer prices assumed in the Budget Act for the year of the increase.

Pensioners can receive a supplementary pension increase in November if the rate calculated on the basis of the inflation data of the Central Statistical Office (KSH) would be at least 1 percentage point higher than the increase percentage in January. In this case, pensioners will receive the difference in November, backdated to January. 

If actual inflation calculated on the basis of the pensioner's basket would be higher than the general increase in consumer prices, this higher rate should be taken into account in the adjustment. If the difference between the August KSH report and the January increase is less than 1 percentage point, the surplus multiplied for the whole year is transferred in one lump sum with the November benefits, and the amount plus the monthly difference will be the basis for next year's increase.

This happened in 2017 and 2019. In 2021 and 2022 an extraordinary raise was also introduced in the summer, the government is not legally obliged to do so, but in years of runaway inflation this extra correction was much needed.

How much did pensions increase before 2012?

Prior to 2012, the January increase was adjusted to the inflation rate for the first three quarters of the preceding year and the fourth quarter of the year before.

Previously, between 2010 and 2012, if GDP had grown by at least 3%, the increase in net earnings would have been factored into the increase in pension benefits, in addition to inflation, but this was never done due to the modest GDP growth at the time. And for a long time before 2010, pensions were increased according to the Swiss indexation, i.e. they were calculated at a 50-50% weight of the expected national net earnings growth and inflation.

However, this proved to be an unsustainably costly solution in 2010, even though it could at least partly prevent the value of pensions from being disconnected from the earnings of the working-age population.

It is no coincidence that the rapid increase in average national wages in recent years has prompted more and more pensioners' organisations to demand the reinstatement of some version of the mixed increase (the Swiss indexation).

In 2012, the hugely unfavourable change in the technique of pension increases was not particularly noticeable to pensioners, as the real value of pensions increased significantly by more than 8% until 2014, despite the fact that the hikes were adjusted to the rate of inflation.

This is because for four years until 2014, the government overestimated expected inflation for political and other economic reasons, and as pensions increased at the rate of estimated inflation, their real value increased rapidly in a lower inflation environment. (One important component of the overestimation of inflation was the utility bills reduction for households). Of course, pensioners were relieved that they did not have to pay back the extra money.

However, this golden age - which in those years was tantamount to a 'dispersed' payment of a 13th month pension - has ended in 2015, while the problem of relative poverty has deepened.

The evidence of relative impoverishment

In the extremely complicated Hungarian pension calculation procedure, the average net monthly career earnings are calculated on the basis of gross earnings between 1 January 1988 and the starting date of the pension setting. This is done by multiplying the annual earnings netted for each year since 1988 by the valorisation (value adjustment) multiplier for that year, to adjust the earnings netted in previous years to the national average net earnings in the year before the year of pension setting.

The valorisation multipliers are reset each year to reflect the nominal rate of increase in national average net earnings in the year before the reference year. The year preceding the reference year thus becomes the reference wage level year. The year in which the pension is calculated and the previous year cannot therefore be revalorised, only the previous years.

The result of this procedure is that the average net monthly career earnings on which the pension is based reflect the net national wage level in the year before the year of retirement, i.e. relative poverty does not yet start to set in. This is caused by the pension increase system, which ignores earnings growth and only tracks inflation.

In other words, the year of retirement is the last year in which the development of earnings is still taken into account (due to valorisation), after which only expected inflation is the basis for pension increases, which unfortunately and inevitably pushes pensioners onto a poverty slide .

In the second part of my article, I will look at the options for correcting pensions.

This article was originally published in 'On the Other Hand', Portfolio's opinion column in Hungarian. The articles in the column reflect the views of the authors, which do not necessarily reflect the views of the Portfolio editorial team.

Cover image (for illustration purposes only): Getty Images