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Unexpected inflation and public pensions: the case of Hungary

Author

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  • András Simonovits

    (KRTK - Institute of Economics, Budapest, Hungary)

Abstract

Since increases in public pensions are generally related to prices or wages or combinations of them, the impact of inflation on the real value of benefits can often be neglected, especially in the case of indexation to prices. With high and accelerating/ decelerating inflation like that currently prevailing in Hungary, however, this is not the case. (i) With fast inflation of basic necessities, the proportional indexation of benefits in progress devalues the lowest benefits, which have to pay for above-the-average consumption share of these goods. (ii) Annual “lumpy” increases of these benefits entail too high an intra-year drop in the real value of benefits. (iii) With accelerating inflation, the declining real value of delayed initial benefits may incentivise immediate retirement. (iv) With unindexed parameter values (like progressivity bending points), the initial benefits’ structure unintentionally changes.

Suggested Citation

  • András Simonovits, 2023. "Unexpected inflation and public pensions: the case of Hungary," Public Sector Economics, Institute of Public Finance, vol. 47(4), pages 505-520.
    • Handle: RePEc:ipf:psejou:v:47:y:2023:i:4:p:505-520
    DOI: 10.3326/pse.47.4.6
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    References listed on IDEAS

    as
    1. Checherita-Westphal, Cristina & Domingues Semeano, João & Ahonen, Elena & Stinglhamber, Pierrick & Van Parys, Stefan & Clemens, Johannes & Urke, Katri & Soosaar, Orsolya & Vergou, Maria & Flevotomou, , 2022. "Public wage and pension indexation in the euro area: an overview," Occasional Paper Series 299, European Central Bank.
    2. Checherita-Westphal, Cristina, 2022. "Public wage and pension indexation in the euro area," Economic Bulletin Boxes, European Central Bank, vol. 1.
    3. András Simonovits, 2023. "Unexpected Inflation and Public Pensions: The Case of Hungary," KRTK-KTI WORKING PAPERS 2306, Institute of Economics, Centre for Economic and Regional Studies.
    4. Barr, Nicholas & Diamond, Peter, 2008. "Reforming Pensions: Principles and Policy Choices," OUP Catalogue, Oxford University Press, number 9780195311303.
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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