Small Early Steps for a Sustainable Pension System

Long-term demographic trends have an impact not only on the working-age population but also on future pensioners. Currently, there are 1 million 998 thousand old-age pensioners in Hungary, a number that is set to grow significantly in the coming years. How does this affect the sustainability of the pension system? That is the question the latest analysis by the Hungarian Economic Research Institute (GKI) undertakes to answer.

Figures by Hungary’s Central Statistical Office (KSH) suggest that life expectancy at birth was 71.4 years in 2000, rising to 76 years by 2022, with life expectancy at age 65 rising from 79.4 to 81.3 years. As the health status of the population improves over time (e.g. fewer people doing heavy physical work or working in unhealthy jobs), life expectancy for those crossing retirement age could reach 85 years.

According to previous estimates by the GKI, a maximum of 2,843,000 people will retire in Hungary in 2024, so that, with life expectancy at age 65 rising to 85, the total number of retired people will be the same, an increase of 42%. But it is not only the number of people that will change pension expenditure: on the one hand, the state increases pensions by inflation and occasionally pays a pension premium, so we expect a 1% increase in real pensions per year. On the other hand, the proportion of future pensioners with a higher education level is increasing, and they will earn more than the average and thus have higher pensions.

But where will the pension come from? The financing of the pension system comes from two main sources: social security contributions (SSC) and social contribution tax (Szocho). In 2024, the Finance Act allocates 89.14% of Szocho to the pension fund and 10.86% to the health fund. 54% of the social security contributions paid will go to the pension fund, with the remainder going largely to the health fund and a smaller share to the National Employment Fund. It can be seen that, in reality, both sources can only raise more resources by increasing taxes/contributions or at the expense of other areas.

The pension system is still sustainable in 2024: the projected pension expenditure is HUF 6,019 billion, while the pension revenue of the Social Security and Szocho is expected to increase to HUF 6,434 billion. By 2043, the scissors of the pension system's revenues and expenditure will open in the other direction: revenues will roughly double to HUF 12,406 billion, while expenditure will rise to HUF 14,786 billion.

Although revenues currently cover pension expenditure, there will be a gap of around HUF 230 billion by 2043 (if the current arrangements remain in place), which will need to be made up in some way. If a solution is sought within the pension system, raising the retirement age or higher rates of social security and Szocho could be the solution: e.g. a 0.15 percentage point per year increase in the Szocho rate or a 0.22 percentage point per year increase in the social security contribution could address the shortfall. As the earning power almost doubles, the central budget will receive additional tax revenues in other forms (e.g. personal income tax, VAT, etc.) and will therefore be able to bear a greater burden on old-age pensions.

It can be seen that there are a number of solutions to address the expected shortfall in time. If small steps are taken now to make the pension system sustainable, drastic measures will not be necessary later, the GKI analysis concludes.