Unexpected Inflation and Public Pensions: The Case of Hungary

Andras Simonovits

Keywords: inflation, public pensions, indexation, progressivity of initial benefits, delayed retirement

TL;DR: How unexpected inflation distorts the functioning of the Hungarian pension system

Abstract: Raises of public pensions are indexed to prices or wages or to their combinations; therefore, the impact of inflation on the real value of benefits can often be neglected, especially under indexation to prices. At high and accelerating/decelerating inflation like currently prevailing in Hungary, however, this is not the case. (i) With fast inflation of basic necessities, the proportional indexation of benefits {\it in progress} devalues the lowest benefits, paying for above-the-average consumption share of these goods. (ii) Annual, lumpy raises in these benefits imply too high intra-year drop in the real value of benefits. (iii) With accelerating inflation, the declining real value of delayed initial benefits may incite immediate retirement. (iv) With unindexed parameter values (like progressivity bending points), the {\it initial} benefits' structure unintentionally changes.