RULES OF CALCULATING OLD AGE PENSION IN THE HUNGARIAN PENSION SYSTEM
Tivadar Dezse Candidate of Ph.D in law
Ferenc Deák Doctoral School for State and Legal Studies, Miskolc
The topic of calculating pensions is one that does not enjoy a lot of attention in the literature dealing with the Hungarian pension system. The calculation rules are complex and complicated, often containing surprising and controversial connections even for the experts, paving the way for drawing wrong conclusions from time to time.
In this paper, I would like to summarize and present the methodology and rules of calculating pension, I would like to point out connections and factors affecting the amount of pension.
The calculation regulations are found within the Act LXXXI of 1997 on Social Security Pension Service (Pension act), specifically at sections 20 through 22 and 37 through 42, furthermore in the Government Decree 168/1997 (6 October) (Pension decree), specifically in sections 14 through 17 and 29 through 59.
The basis for calculating aids for relatives is often the amount of old age pension, thus in this paper, I will only present the methodology of calculating the old age pension.
CALCULATING PENSION
The sum of old age pension is calculated as the pre-defined percentage of the average earnings used as the basis of the pension belonging to the time worked. [1] The calculation, therefore, is a multiplication: a certain percentage of the pension basis multiplied by time of service. To achieve the full entitlement to pension, one needs 20 years of service, and the pension amount has a minimum. Lacking the the 20 years' time of service, after 15 years of service, partial pension can be calculated with no minimal value. [2] The amount of old age pension can exceed the amount of pension basis only if after achieving the retirement age, further length of service without calculating pension entitles the person for it. [3]
Length of service
In certain types of social security systems, the scale of performance is essential in deciding upon both entitlement to care and the amount of care. There are multiple solutions to measure social security performance. It can be interpreted as the scale of income for work: in this case, income for work and the amount of care are connected in a proportional relation. When the social security performance is based on insurance contributions actually paid, then the amount of care depends on life expectancy and achieved yield. It is also possible that one of the conditions to receive said care is a certain length of time spent insured in social security: in this case, the decisive factors
MultiScience - XXXIII. microCAD International Multidisciplinary Scientific Conference University of Miskolc, 23-24 May, 2019, ISBN 978-963-358-177-3
DOI: 10.26649/musci.2019.059
when calculating the care are the length of time spent insured and the start of receiving the care, i.e. retirement age.
In Hungary, the factor used for measuring insurance performance is the length of service. Since 1998, as a main rule, length of service includes every period during which pension contributions have been paid. [4] The obligation to pay contributions can occur during an insurance period (typically employment relationship, as a sole trader or part of a corporate body, or special order contracts), while receiving aid subject to contributions (unemployment aid, aid after children), or voluntary pension contribution payment due to an agreement with the state pension security organ.
Length of service is counted after paying the contribution, except if the contribution is deducted from the income or aid, because in these cases, the length of time is calculated even if the contribution is not actually paid. [5]
In Hungary as an addition, there are periods qualifying to be included in the length of service where contribution was not paid: this is the period men spent conscripted in the army, or the periods people spent in trade schools or, before 1998, in tertiary education. The periods qualifying to be included in the length of service from before 1998 are listed in detail in the Pension act and the Pension decree.
Those not earning an income at least reaching the minimal wage as part of an insurance relationship, the length of service to be taken into account to calculate the pension has to be decreased in proportion of the actually earned income and the minimal wage. [6]
Calculating the average income (pension basis)
The average income has to be calculated from the gross income earned in the period between 1 January 1988 and the calendar day before retirement (calculation period).
Income means earnings made while working the main job (or if work time in the main job was shorter than full time, then in secondary jobs as well) before 1997, and earnings made within insured relationships since 1996. Social and social security aids that are subject to contribution, in addition to income earned while receiving social and social security aid can only be taken into account if that is more favourable to the person to receive pension. [7]
The first step in calculating the average wage is to check whether the calculation period is valid or not: the period qualifies as valid if the requester earns enough income to be taken into account at least half of the time. Should the calculation period be deemed invalid, then, in order to make the period valid, income from the time directly preceding 1988 has to be taken into account, or, lacking that or verifiability thereof, the income has to be complemented with the minimal wage calculating backwards from the day the amount of pension is calculated. The function of verifying the calculation period is to make sure that in order to calculate the average where periods of lower income can be counterbalanced by periods of higher income, there is enough income.
The next step is to check against the cap on contribution for the income taken into account. There was a cap on pension contributions in place between 1 March 1992 and 31 December 2012 which meant that as the contribution was paid after a predetermined maximum amount of income, there was no obligation to pay further
contribution. Hence, the extra income did not constitute as a basis to pay contribution, so it was impossible to be taken into account while calculation the pension basis.
In the next step, income for all years earned not during the full year but only a part of it has to be annualized: first, the total amount has to be divided with the days when income was earned, then the daily average has to be multiplied by the days in the calendar year. We need to deduct the contributions from the income thus calculated, i.e. netting the gross income using the taxation and contribution rules of the year in questions, applying possible discounts.
After this, the netted annual income needs to be valorized, meaning the wages of the previous years have to be multiplied to the wage level of the year preceding retirement. This multiplication has to be done in accordance with the national net increase in average income between the year in question and the year before retirement, and not with inflation, as many think. The function of this step is to be able to work with incomes on a roughly same level as the average, excluding the distort effect stemming from the nominal incomes of earlier years.
In order to get the average income to serve as pension basis, the net valorized incomes shall be added up, and the sum has to be divided by the number of days spent earning (i.e. calendar days passed, deducted by the days when no income was earned, e.g. sick leave, unpaid leave etc.): the average sum thus received must be multiplied by 365 and then divided by 12 to receive the monthly average income.
As a final step, the regulation includes a degression step as well: the pension basis received has to be decreased by 10% if between HUF 372 000 and 421 000, and 20%
if above HUF 421 000. [8]
ANOMALIES, PARTICULARITIES
When applying the rules above, there are situations that, with some circumstances aligning, affect the final calculation of the pension in a distorting, surprising or unjust way. Allow me to present a few of them.
Minimal pension
As presented above, the amount of the pension has to be calculated by multiplying the average income serving as pension basis by a percentage substutional proportion.
Pursuant to legal rules, the full amount of old age pension may not be less than the amount of minimal pension, i.e. the result of the multiplication must exceed the minimal pension. (this protection does not apply to partial pensions) [9]
Showing it in practice: With 40 years of service, which means an 80% of substitutional rate, using the pension basis of 30.000 forints, the pension calculated would be 24.000 forints, but, considering current time minimal pension rates, the amount changes to 28.500 forints.
Should the pension base change to 25.000 forints, the amount calculated using 40 years of service would end up being 20.000 forints, but pursuant to the legal regulation in effect, the amount of aid provided shall be the pension basis and not the minimal pension.
Minimal pension rules, thereby, protect only those amounts that drop under the minimal pension after the multiplication is done, but don't protect the amounts that were under the minimal pension rate in the first place. If the calculated pension base falls below the minimal pension, then the aid provided shall be equal to the pension basis, and does not raise to the amount of minimal pension. This, at the same time, means that the returning wish of raising the minimal pension is not thought through well: as per current rules, the higher the minimal pension is raised, the higher number of people would be impacted by being "locked" under the minimal pension.
Days excluded
The average monthly income serving as basis for the pension calculations (pension basis) is calculated by adding up the net valorized annual incomes and dividing it by the days spent earning, i.e. the daily average income. The days exluded are those that are not included in this calculation as they were not spent earning income.
Based on the calculation rules, the higher is the number of days excluded, the lower is the number of days spent earning income, meaning that the daily (and monthly) average income grows as the number of days excluded from earning grows, taking the same income into account.
The calculation examples in appendix 1 clearly show that with the same income, as the number of days exluded grows, so does the amount of pension, even without paying additional contribution.
Leveling out average income
The amount of pension can be calculated for any point in time in the past for anybody who has the necessary data: the annual gross income subject to contributions for the calculation period.
The size of the eventual pension basis can be significant for two different reasons:
On the one hand, if one would like to come clear about the expected amount to be provided, as not only the old age pension, but in case of death before retirement age, the basis of the aid provided to relatives is included in the pension basis as well. On the other hand, if one wants to affect the size of the care to be provided.
As an example, say that the amount of pension basis for the end of 2017 is 200.000 forints. As the pension basis is the result of a calculation of average, it is easy to calculate how much the income subject to contributions has to be for the next year (or the one missing somewhere during the career) so that the amount of the pension basis can remain unaffected. In the example above, one would need an income subject to contribution amounting to 3.464 million forints. If the income is less than this, the average income decreases, if higher, it increases. Should there be no income to be taken into account during the year in question, the average would not change, i.e. paying contributions after 3.464 million forints has the same effect on the pension basis as paying no contributions whatsoever. (Appendix 2)
As the amount of pension depends not only on the average income but also on the length of service spent as well, it means that we can draw the logical, if surprising, consequence that high pension comes from high average income more than it does
from long period of service. If the pension basis decreases as an effect of the incomes being included in the calculation, it may decrease the amount of starting pension even if the period of service increases. One receives higher pension with half the period of service but high average income than one does with twice the period but half the average income.
Distorting effect of income taken into account without paying contribution
In the above, I presented the main rules of calculating pension: the amount of pension depends on the average income and the length of service. The average income has to be calculated from the income subject to contribution earned during the calculation period. Length of service includes periods in time covered by paying contribution and spent performing one's main job, covered by social security. Periods without paying contributions can be included in the calculation period as time of service if there was a social security membership and lack of contribution paid is not attributable to the person insured.
It is important to summarize this briefly, because in one case, one can significantly affect the pension received without paying contribution. The period when a person, insured as a sole trader or a member of a corporate body, owes any contribution, cannot be included in the calculation period. [10] However, the contribution owed only affects the inclusion of the period mentioned into the length of service. The regulation does not preclude including the income earned during this period in the calculation of average income, which means that, even in the case of contribution owed to the state, the average income has to be calculated based on the income subject to contribution earned during the calculation period. [11]
This means that the income earned by the person insured as a sole trader or as a member of a corporate body from this relationship will count as income to be included in the pension calculation even if the corporate body or tradership has never paid a dime in pension contributions.
REFERENCES [1] Section 20 (1)- (2) of the Pension Act
[2] Section 18 (2)- (3) of the Pension Act and Section 20 (3) of the Pension Act [3] Section 21 of the Pension Act
[4] Section 37 (1) of the Pension Act [5] Section 37 (3) of the Pension Act
[6] Sections 38 through 42 of the Pension Act and Sections 29 through 59/B of the Pension Decree
[7] Section 22 (1)-(4) of the Pension Act and Section 14 (1) b) of the Pension Decree
[8] Section 22 (5)-(11) of the Pension Act and Section 15 through 16 of the Pension Decree
[9] Section 20 (3)-(4) of the Pension Act [10] Section 38 (2) of the Pension Act [11] Court decree no. K-H-MJ-2015-230.
Appendix 1
Appendix 2
