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Pensions reforms in Hungary - background summary (updated March 2019)

Characteristics of the Hungarian pension system

The pension system is a mandatory, uniform, defined benefit pay-as-you-go system with an earnings related public pension combined with a minimum pension. It is a multi-pillar system that was created in 1997. The number of elderly people receiving retirement pension in Hungary was close to 2 million in January 2018. Qualifying conditions are: reaching retirement age; obtaining the required minimum service period; and ceasing gainful activity. The standard retirement age was 63 years in 2016 and is scheduled to reach the age of 65 years by 2022. In addition, 20 years’ service is required for both the earnings-related pension and the minimum pension. 15 years’ service is required to receive a partial pension without eligibility to the minimum pension.

  • The first pillar is the state-run, social security pension pillar; the second is the private pension fund system; the third is the voluntary private pension fund system.
  • The voluntary private pension fund system is divided into four more pillars: a) supplementary private pension funds, b) the pre-retirement saving account; c) the occupational pension scheme, and d) products of private insurance.
  • Until the end of 2010, the mandatory pension system was a two-pillar system: the first pillar was the social security pension system and the second pillar was the private pension fund system.
  • Three-quarters of the pensions of those choosing the mixed system have been paid for from the first pillar and the remaining quarter has been provided for from the second pillar.
  • The private pension fund members had to pay 6 percent of their taxable income to private pension funds in 1998, 7 percent in 1999 and 8 percent in 2000. The membership fees paid by the members were transferred to their individual accounts.
  • They also had to pay a reduced contribution of 1 percent to the state pension fund in 1998. In 1999, 2000 and 2011 this contribution was 2 percent.
  • The employer’s pension contribution was 24 percent in 1998, 22 percent in 1999 and 2000, and 24 percent in 2011. 

An overview of pension reforms in Hungary

  • The declared objective of the 2010 pension reform was ‘to return to the two-pillar pension system, based on social solidarity, on the one hand, and to voluntary contributions on the other hand’. The underlying objective was to increase the fiscal space of the government by re-directing private pension funds into the state coffers (at a value corresponding to around 10% of GDP).
  • On 13 October 2010, the Orbán administration announced that it would divert the 8-percent-of-gross-wage private pension fund contribution of Hungarian employees to the state for a period of 14 months, beginning in November 2010.
  • The declared objective was a temporary diversion of mandatory private pension fund contributions to the state, but with the creation of a ‘fait accompli’ situation the diversion became permanent. The aim was to help the Orbán government to reduce the central budget deficit to the 3% of GDP and to cover the fiscal gap created by the planned introduction of the flat personal income tax. A substantial part of the acquired private pension funds were used to cover current expenditures and to gain Hungary’s removal from the European Union’s Excessive Deficit Procedure.
  • From 3 November 2010, entrance to the private pension funds was no longer required for new entrants to the labour force. Around 3.2 million fund members were left no other realistic option than return to the social security pension system.
  • By 31 January 2011, the private pension fund members had to declare if they wished to maintain the membership in the private pension funds, amid threats that when remaining they lose their entitlements in the state-run system. Those who failed to make a declaration automatically they lost their private pension fund membership and entered into the first pillar. Only 3%of the full members decided to stay in the second pillar pension scheme.

In 2019, the OECD published a report, the 2019 Economic Survey of Hungary, that assessed the demands on public finances arising from this population-ageing challenge. The authors concluded that over the next 50 years, the old-age dependency ratio will double, and public spending on pensions and health-care is set to increase. Current public spending on public pensions is among the lowest in the OECD, but it is expected to increase by some 3 percentage points of GDP by 2070. People will also spend more time in retirement, while there is a high risk of old-age poverty. Already at the moment (early 2019), some 20% of pensioners receive pensions below the poverty line.

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