Economy 23 January 2025, 9:00am

How can Hungarian pensioners avoid the poverty slide?

Farkas András

Hungarian pensioners have been on a poverty slide after 2015 and it looks very unlikely that there will be a turnaround for the time being. What are neighbouring countries doing differently and how can the situation of pensioners in Hungary be improved?

How do others do it?

Every EU country is constantly looking for the most effective way to maintain pensions. Governments have three basic choices when it comes to setting the conditions that govern the rate of pension increases:

either the increase depends only on inflation (the consumer price index, including the general or pensioner price index), which is the predominant solution from France to Austria and Belgium, or
the increase depends only on wage index (including nominal or real changes in gross or net earnings), as in Germany, or
or a combination of the two (mixed index), as in Finland (80% price index, 20% wage index), Norway (50-50%), Slovenia (40-60%).

In some other Member States, the compounding takes into account 100% of inflation plus x% of real wage growth, if there is any. Thus, the pension increases are determined by the countries concerned on the basis of the following factors:

in the Czech Republic, Slovakia and Latvia, they are based on total inflation plus 50% (33% in the Czech Republic from 2025) of real earnings growth, and
total inflation plus 20% real earnings growth in Poland.

Each country chooses differently the reference period to which to adjust the rate of pension increases for inflation, ranging from 3 months (Finland) to 7 years (Lithuania). The most common reference period is 12 months, but there are also examples of 4 months (Belgium) and 6 months (Slovakia, Luxembourg).

Each state must also choose whether to implement the pension increase with an ex-post increase based on actual data for the reference period or with an ex ante increase (and ex-post correction) based on projected data for the reference period. Apart from Hungary, Sweden, Italy and the Netherlands increase pensions on the basis of projections, while the other Member States increase pensions ex-post on the basis of actual data. In Italy, the correction required after the January increase is applied to the next January increase, in the Netherlands 50% of the increase is applied in January and 50% in July, adjusted according to the Dutch national wage bill. Under the Swedish system, pensions taken before the age of 65 are indexed only in line with inflation (price index) until the pensioner reaches 65, while pensions taken after 65 or earlier are indexed to wage growth after the pensioner reaches 65, but the wage index is reduced by the pre-indexed interest rate used to determine the pension.

The frequency of the increase also varies from one state to another, with either a fixed frequency or an increase when inflation exceeds a certain threshold. The frequency of pension increases varies between countries that choose a fixed frequency: instead of the typical once-yearly increase,

pensions were increased monthly in Italy during the pandemic emergency,
twice-yearly in Hungary, the Netherlands, Türkiye and Australia, and
only every two years in Switzerland and every three years in Poland.
Belgium (if inflation exceeds 2%) and Luxembourg (2.5% threshold) increase their pensions according to a fixed threshold.

Recent OECD analyses show that it is not the overall or pensioner CPI, but the consumer baskets measured by income deciles (deciles) that show significant differences, so it is worth examining the possibility of adjusting the pension increase to consumer baskets measured by income stratification.

All this shows that essentially all EU (and OECD) Member States are constantly looking for the optimal pension strategy that best suits their demographic and economic situation - with the exception of Hungary, it seems...

The obvious solution

The pension increase must not only slow down the relative decline (the reintroduction of the 13th month pension will do this, as long as the necessary HUF 5.5 billion can be found in the budget), but also address the unfairness of the pension for those with previously established pensions, which are therefore increasingly shrinking in value.

Therefore, in addition to mixed indexation in line with wages and inflation at a predetermined percentage rate, it would be advisable to incorporate as soon as possible into the pension increase system a corrective indexation to ensure a compensatory increase in pensions that have slid deeper and deeper down the poverty slide of previous years, i.e. to adjust the value of the valorisation multipliers to the current value.

If this does not happen, then, despite the dampening effect of the 13th month pension, a specific increase in pensions for corrective purposes may become unavoidable in order to reduce the unfair difference in pension amounts according to the year of retirement and the unjustified disproportionality between pensions, which has nothing to do with justified differences according to the earnings underlying the pension and the length of service.

The system of pension increases must therefore address not only the continuing disconnection from the average net national average earnings, but also the fragmentation of the pensioner population.

Only a differentiated rate of pension increases, for example through the banding method, where the smaller pensioner receives a larger proportion or a larger amount of pension increase, can slow down the fragmentation. The 13th month pension, which provides each pensioner with an amount equal to his/her February pension, has put this fragmentation effect into turbo gear, as there is no upper threshold for the 13th month pension. In European pension systems that have an additional benefit such as the 13th month, the amount that can be paid is capped or set at the same amount for everyone.

A revision of the pension increase based on a Swiss-style mixed indexation is therefore necessary but not sufficient, and a valorisation correction according to the year of pension establishment and a banding correction depending on the amount of the pension should also be incorporated into the new procedure for the increase.

Perhaps after the 2026 elections, some government attention can be focused on this before the Hungarian pensioner population becomes irredeemably poor.

This is On The Other Hand, the opinion column of Portfolio. Articles reflect the views of the authors, which do not necessarily reflect the views of the Portfolio editorial team.

Cover photo (for illustration purposes only): Getty Images