Published: December 21 2023
Planning for financial stability in retirement is a concern not only in Hungary but worldwide. With an aging population, there are challenges in sustaining state pension systems and ensuring sufficient funds for retirees. This article will discuss the functioning of the state pension system in Hungary and explore options for individuals to increase their retirement income.
The Functioning of the State Pension System
In Hungary, the compulsory state pension system operates on a pay-as-you-go basis. This means that the retirement benefits are funded by the contributions of the active working population. However, as the number of retirees increases and the number of contributors decreases, there is a financial strain on the system. The Central Statistical Office predicts a decrease in the overall population and an increase in the percentage of retirees by 2050. This poses challenges for the sustainability of state pensions.
Challenges in the State Pension System
With a decreasing number of active workers supporting a growing number of retirees, it is unlikely that state pensions will see significant growth. Currently, the average state pension in Hungary is 58% of the net average salary. If current trends continue, this gap is not expected to decrease significantly. To ensure a comfortable retirement, individuals will need to consider additional retirement savings.
Options for Increasing Retirement Income
There are various retirement savings options available in the market to supplement state pensions. Two popular options are:
- Retirement Supplementary Insurance: This is a savings-based life insurance contract specifically designed for retirement purposes. Individuals can choose different investment funds offered by insurers and decide how their contributions will be allocated. The accumulated amount can be paid out as a lump sum or as a pension upon retirement or in the event of a significant health impairment or death. The insurance contract is not affected by changes in the state pension age.
- Voluntary Pension Funds: Voluntary pension funds aim to provide financial security in retirement and improve the standard of living. Membership can be established from the age of 16, with flexible and regular contributions. These funds offer various investment portfolios based on an individual’s risk tolerance and age, similar to retirement supplementary insurance.
Considering these options and starting early can help individuals secure their financial stability in retirement and bridge the gap between state pensions and desired income levels.
Questions & Answers
Why is the issue of financial stability in retirement important in Hungary? The issue of financial stability in retirement is important not only in Hungary but worldwide. According to UN projections, by 2050, 33% of the global population will be over 50 years old. With population decline and an increase in the number of elderly people, there is a growing concern about how to sustain the state pension systems and whether these systems provide enough money for livelihood in old age.
How does the state pension system in Hungary work? In Hungary, the mandatory state pension system operates on a pay-as-you-go basis, where retirement benefits are based on societal solidarity. This means that the working-age population contributes to the system through their social security contributions, which are immediately distributed among retirees.
What is the outlook for the Hungarian pension system? The Central Statistical Office provides data and projections on the age structure of the population in Hungary. According to these projections, the proportion of retirees will increase from 20.5% of the total population in the current year to 26% by 2050. Although the number of retirees will not significantly increase, the overall population will decrease by nearly 1 million people by 2050. This means that fewer active workers will have to cover the pension payments with their contributions. Given these circumstances, it is unlikely that there will be significant growth in state pensions in the future.
How can you increase your pension in Hungary? There are various pension savings options available in the market to supplement your pension in Hungary. Two common options are:
- Pension supplementary insurance: This is an investment life insurance policy specifically designed for retirement purposes. Insurance companies offer different fund options for investment, and you can choose how your premiums are allocated among these funds. The insurance company will pay out the accumulated amount when you retire, experience disability above 40%, or in the event of death.
- Voluntary pension fund: The primary goal of voluntary pension funds is to ensure financial security during retirement and improve the standard of living. Membership in voluntary pension funds can be established from the age of 16, allowing for flexible and regular contributions. You can choose from different investment portfolios based on your risk tolerance and age.
It is important to note that these are just two options, and individuals should consider their own financial situation and goals before making any investment decisions.