Transformation of the pension system in Hungary: possibilities and reality

In Hungary, as in the rest of Europe, the proportion of the population of retirement age is increasing significantly, which affects several economic issues.

The number of employed people of active age is decreasing, and passive expenditures such as pensions, health care costs, and other social payments are increasing.

Some believe that the pension system will collapse, but the following data indicate that this is currently unlikely, even under the current pension rules.

In 2010, pension benefits accounted for 11% of GDP, and there were 1 million 848 thousand pensioners. In 2022, pension expenditures accounted for 8% of GDP, and there were about 2 million pensioners. This means that with an increasing number of pensioners, 3% less had to be spent from the value of GDP.

The OECD has made recommendations for reforming the Hungarian pension system, but a significant part of the recommendations ignore the facts that characterize Hungarian demographic processes.

According to the proposal, it would be important to gradually raise the retirement age in line with life expectancy. This would mean that the retirement age would increase by 8 months for each year of life expectancy from the age of 65.

In Hungary, the number of years spent in good health by men is 61.8 years on average, and 63.9 years for women. Life expectancy at birth in Hungary is: Men: 74.83 years, Women: 80.56 years. Raising the current retirement age of 65 would significantly reduce the number of years spent in retirement, which would not encourage an increase in the amount of contributions paid.

At the same time, an early retirement option with a reduced pension would be introduced, so that employees could decide for themselves whether they want a lower pension for a longer period or a higher pension for a shorter period.

As can be seen, the number of years spent in good health by the Hungarian population is low, below the current retirement age, so more people would probably choose early retirement, but this would significantly reduce the number of active employees.

In Hungary, women can retire after 40 years of employment. According to the OECD proposal, this should be phased out or a 60-year age limit should be introduced and the age limit should be continuously increased.

The proposal ignores the fact that the number of potential beneficiaries is constantly decreasing, given that since 1989, partial 4-6 hour employment has been characteristic of the labor market, alongside which 40 years of qualifying time cannot be reached even by the age of 65. The average age of those currently retiring with 40 years of employment already exceeds 60 years. Based on the data, the Women40 program will cease to exist due to a lack of applicants. The program is an acknowledgment that women generally bear greater burdens in society than men, so its political implications cannot be ignored.

The 13th-month pension system should be reviewed and possibly transformed into a targeted form of support for pensioners in need.

In 2010, less than 2% of pensioners received a pension of less than HUF 50,000, while in 2022, the lowest pension amount was below HUF 100,000, received by more than 8.5% of pensioners.

According to statistics, the number of those receiving low pensions has increased. One can agree that the 13th-month pension should be provided to those who receive the lowest benefits, but it would be best to incorporate that amount into increasing pensions that do not exceed the average pension.

The OECD also recommends the creation of an employer pension pillar, which would complement the state pension system.

In Hungary, in addition to the state pension system, voluntary insurance can also be taken out to supplement the pension amount. However, it should be mentioned that the population’s savings capacity is low. For a meaningful pension supplement (HUF 100,000 per month), men need HUF 10,800,000 for 9 years spent in retirement, and women need HUF 18 million for 15 years spent in retirement.

In 2021, the net monthly average wage was HUF 344,000, so the necessary savings can be achieved by men with a monthly payment of HUF 50,000 in 13 years, and by women with a monthly payment of HUF 50,000 in 20 years, with the current tax benefits and returns.

According to the current situation, the average pension savings amount is HUF 2 million, which those affected usually withdraw in a lump sum because it does not represent a meaningful supplementary amount.

The creation of a company pension pillar is opposed by the fact that only 28.5% of Hungarian companies are older than 20 years, and there are few large companies with significant assets among them. The proportion of companies employing more than 5,000 people does not reach 0.2%, so there is no corporate structure of sufficient size and stability to create an employer pension pillar.

The state of pensions is an important indicator of the state of a country’s welfare system. It can be concluded that in order to maintain a stable pension system, the goal must be to increase the level of contributions, and this is possible by increasing the productivity of living labor and the GDP produced per capita.