Hungary Proposes Pension Reform to EU as System Faces Long-Term Challenges

The Hungarian government has pledged to implement reforms aimed at improving the medium- and long-term budgetary sustainability and adequacy of the pension system. The move comes as part of a series of measures that Budapest is undertaking in exchange for development funds being released by the EU.

The European Commission released this week its assessment of Hungary’s recovery and resilience plan. While the EU executive gave a green light to the plan, it also highlighted several pain points of the country’s economy. “Hungary’s economy and society face a number of long-term challenges … ensuring sustainable productivity growth will require sustained reforms and investments in education, skills, healthcare and the quality of public institutions. In particular, a more skilled workforce and a more robust institutional framework are essential to move away from a model based on low labor costs, towards a more knowledge-based, sustainable economy producing advanced products,” the report said. The EC highlighted that the plan includes a broad mix of reforms and investments, with a particular focus on the green transition, digital transformation, building economic, social and institutional resilience, and on policies for the future generations. It also includes measures to support sustainable and inclusive growth, as well as social and territorial cohesion.

Pension reform on the horizon
Of the nine components that Hungary’s plan consists of, one is focused on demographics and contains reform measures aimed at improving the medium- and long-term budgetary sustainability and adequacy of the pension system, according to the EC.
The Brussels-based institution stressed that Hungary’s “population aging and the increase of public debt during the COVID-19 crisis intensified long-term fiscal sustainability challenges. The pension expenditure is projected to rise substantially, from around 8% in 2019 to above 12% of GDP in 2070. The fiscal sustainability indicators point to medium sustainability risks in the medium term and high risks in the long term. Recent policy measures exacerbate this sustainability challenge by increasing the government’s long-term pension liabilities. In particular, the reintroduction of the 13th -month pension in 2021 and 2022 increases expenditure on pensions. The system also faces challenges related to fairness: changes to tax and pension systems in the last decade are projected to increase expenditure on the 12 pensions of high-wage retirees and amplify inequalities among pensioners. Those measures include the removal of the ceiling on pensionable income and pensions and the introduction of the flat personal income tax that boosts pensionable income of high earners. At the same time, the minimum pension has remained nominally unchanged since 2008, which affects the situation of those with interrupted employment history and low average earnings during their career.”

Increasing the retirement age
The Commission expects Hungary to present an international expert report on policy options for addressing long-term sustainability challenges in the pension system. The government must provide a diagnosis of the pension system and its financial sustainability. In addition, the Cabinet should put forward specific policy proposals focusing on extending working life periods, including by linking the legal retirement age to life expectancy, as well as increasing the actual retirement age, and sanctioning early retirement. Finally, it must ensure the long- and medium-term sustainability of the pension system through appropriate income measures and automatic equalization mechanisms, as well as by curbing the predicted increase in pension expenditures expressed as a percentage of GDP by 2070 compared to the forecasts of the 2021 aging report.
The indicative timeline for the completion of this report in the 4th quarter of 2023, according to the Commission. As a next step, the government has to prepare a policy proposal for amending the pension system by the second quarter of 2024. The third phase of the process is scheduled for the first quarter of 2025, when Hungary is expected to introduce legislation amending the pension system.