The Hungarian Old Age Security System in 2020

By József Hajdú, University of Szeged

The Hungarian old age pension insurance dates back to 1928 and the enactment of the Old Age, Disability, Widowship and Orphanship Insurance Act. With several significant pension reforms over the following years (most notably in 1944, 1951 and 1975), the system was fundamentally and progressively reformed in order to provide greater protection against financial risks in old age to the majority of the Hungarian workforce. Back in 1993, the traditional public pension insurance was supplemented by the establishment of voluntary private pension insurance and other private saving options such as pension savings accounts. Following the work of the World Bank in the country, in 1998 a multi-pillar pension system was established consisting of a compulsory statutory pension scheme based on pay-as-you-go (PAYG) social insurance (also referred to as Pillar I), a privately managed and fully funded private compulsory pension fund (also referred to as Pillar II), and the already existing fully funded voluntary pension insurance (also referred to as Pillar III). In 2010, a structural reform took place which closed the private compulsory scheme on 31 January 2011, without providing previous members with the option to continue their membership on a voluntary basis. Unless they declared otherwise, members were mandated to continue their insurance solely in the public scheme and their accumulated capital was transferred automatically. Ultimately, only 3% of the members chose to keep their accumulated capital in the private scheme. The pension system thus returned to the original pension structure, based on a compulsory, PAYG-financed social insurance system. Nowadays, ‘standard protection’ in the country is provided through insurance in a public, defined benefit scheme. Public pensions can be ‘topped up’ through insurance in voluntary occupational and private pension schemes. A ‘minimum’ level of protection is guaranteed by the minimum pension level of the public scheme and means-tested social assistance measures.

Standard Protection in Old Age

The social insurance pension scheme (társadalombiztosítási nyugellátás) is a PAYG-financed, defined benefit scheme that covers mandatorily all types of employees in the public and private sectors, as well as the self-employed; the scheme also envisions some possibilities for voluntary insurance. The scheme provides earnings-based old age pension benefits (öregségi nyugdíj). Entitlement to those benefits is based on reaching the statutory retirement age and acquiring the necessary insurance periods (i.e. a minimum of 20 contributory years). Since 2011, a special retirement regulation provides that women who have acquired at least 40 years of eligible insurance periods can retire regardless of their age¹. Previously, the social insurance pension scheme used to contain special regulations also for persons with long service or for certain occupational groups (such as miners and military staff). However, in 2012, reforms which aimed at achieving greater system sustainability considerably limited the rights stemming from these special regulations. Special retirement rights are only available to persons who had qualified for retirement until 2012 under the former retirement rules.

Top-Ups

The public pensions can be topped up by different private and occupational schemes. The occupational pension retirement scheme  (foglalkoztatói nyugdíj) represents a relatively new form of supplementary pension insurance in Hungary. Contributions to the scheme are usually mainly paid by the employer but employees are also able to participate. The scheme offers tax reliefs on benefit payments. The regulation of the occupational pension retirement scheme has been modelled according to European Union law requirements on occupational retirement provision. However, for the time being, occupational pension insurance is not very widespread. The voluntary mutual pension scheme (önkéntes kölcsönös kiegészítő nyugdíjpénztár) is the oldest private voluntary top-up scheme in the country. It offers possibilities for both open-end pension insurance (available for the individual) and closed-end pension insurance (available for employers and their employees). This dual purpose of the voluntary mutual pension scheme has resulted in uneven regulation of the scheme. In terms of the overall amounts of paid benefits, the scheme has so far been unable to practically become a funded product that efficiently supplements the public pension. Participation in the scheme is incentivised through certain tax reliefs on benefit payment including the possibility for tax-exempt withdrawal of accumulated capital (subject to certain requirements on longevity of membership or reaching the standard retirement age). In addition, the private  pension savings account  (nyugdíjelőtakarékossági számla, NYESZ) provides voluntary possibilities for personal supplementary pension insurance. Participation in the scheme is incentivised by tax reliefs subjected to requirements for membership longevity and reaching the standard retirement age. Old age income can be further supplemented by retirement (life) insurance  (nyugdíj (élet) biztosítás) where payment by the insurance company is activated on the basis of the realisation of different insurance events.

Minimum

The social insurance pension scheme contains a minimum statutory pension level for those who meet the minimum qualifying criteria and whose pension falls below this level. The minimum pension amount has remained unchanged since 2009. Those who have reached the standard retirement age, but are not eligible for social insurance pension and have no other source of sufficient income can apply for a tax-financed and means-tested old age allowance  (időskorúak járadéka). It is a social assistance allowance for destitute elderly persons.

¹ This regulation is referred to as old age pension for women with 40 years of eligibility period (nők kedvezményes öregségi nyugdíja).