Belgian pension reform, what remains on the to-do-list?
In recent years, many countries worldwide changed their pension systems, in response to the ageing of society. Belgium took part in this but was amongst the worst pupils in the class. Some decisions were taken and implemented, but a lot of what needs to be done was delayed over and over again. What can we expect in the coming years?
Belgian citizens are very much aware of the fact that a lot remains to be done. A poll in 2019 showed only a quarter of the respondents had confidence in the capability of the government to pay for their pensions, more than half was worried.
Before we have a look at what has already been done, a little reminder of how financing of pensions in Belgium is organised. Those pensions consist of different parts, called pillars. Traditionally, three pillars are mentioned, but many people trust on a fourth one: your own assets (home, savings, …). For that fourth one there is no official policy.
The first pillar is the ‘official pension’, a part of social security. Those pensions are paid for by contributions from employers and employees, and party by alternative financing/taxes. The Belgian first pillar is more generous than in other countries, but the generosity is very uneven: civil servants get a high pension, employees a rather low one, and self-employed even less.
To give employees a better perspective, there is the second pillar: an extra-legal pension paid for by employers in favour of their employees. Where in the first pillar the active of today pay for the pensioners of today, in the second pillar the money is saved on individual accounts. This is also the case for the third pillar where people can save for themselves. Pillar two and three are promoted by the federal authorities via tax advantages.
Since Belgium is slower than other countries in reforming the pension system, it should come as no surprise that the system costs more here. It is expected that the cost of pensions will take up 14,7% of the GDP by 2060 whereas the EU average will ‘only’ be 12,5%. Other European countries are doing much better in containing the cost, if we look at countries such as Italy or Sweden for example, we see that they have succeeded in levelling the cost of pensions thanks to their reforms.
Why? The simple explanation is that Belgian live long but work only a limited number of years. As a rich country, life expectancy is high. But the careers are short. Because people study long but most of all because of a tradition of (very) early retirement. Things are improving but the employment rate of people older than 55 remains lower than elsewhere.
Pushing upwards the age of retirement was therefore a priority of several governments in recent decades: the official age (to 65 for everybody, then 66 by 2025 and 67 by 2030) and the effective age (by limiting the possibilities for early retirement). Further measures were about the promotion of different systems in the second and third pillar.
The list of what hasn’t been done is longer than that of what was done. How about early retirement for people with hard, unhealthy jobs (who, and what preferences should they get)? What about part time pensions? The convergence of the three regimes (equal treatment civil servants, employees and self-employed). Making the second pillar general. The pension for people working for the local authorities.
The biggest to-do is the comprehensive reform (of the first pillar) assuring sustainability, fairness and transparency. This is known as the ‘points-based pension’, a new method of calculation that should bring a structural solution, also used in other countries.
During his/her career, the worker would collect points. For every year, the number of points depends on the ratio between the salary of that individual and the average salary. For example, somebody who gets the average salary for 42 years, would collect a total of 42 points.
After the career, so on retirement, the points are converted into euro, according to the retirement age. Your pension allowance would depend on your number of points, the value of such a point and a age coefficient. Working longer would be rewarded, working shorter dissuaded in a financial manner.
The problematic part of the proposal is the value of a point (how many euro per point). That value would only be decided at the time of retirement, by the government, on the basis of the financial possibilities at that time. The value will be in accordance with the average income in the country, but the exact ratio is to be decided then.
In this system the duration of a career is more important than the reference retirement age. This is an advantage in terms of equality. Somebody who had a short education, and went to work at a young age, could take up his retirement at an earlier age, than somebody with high education. Low-skilled workers normally have a harder, unhealthier job, so stopping somewhat younger is a good idea.
Another advantage of the system is the possibility for part-time pensions. People who want to continue working at an older age, could take up part of their points, while at the same time work part time and keep collecting some points.
Also positive is that in this system you could give additional points for people in hard, difficult jobs. Each year the hardship of a job can be evaluated. People in those jobs will have more points sooner and could therefore choose to stop at a younger age.
The points-based system is a fair system, with an eye for financial sustainability, but with the disadvantage that the value of a point remains uncertain and open to political arbitrage.
While social partners and politicians keep discussing the pro’s and cons of the points-based system, one idea is to take away the uncertainty of the value of a point. The calculation would then be based on euro instead of points.
And there are also proposals with a different logic: simply give more income to the pension system, so the allowances can remain as they are. Giving everybody a minimal allowance of 1.500 euro. Lowering again the retirement age. Generalising and enlarging the second pillar (so the first becomes less important).
If you are getting tired of this ever-lasting discussion, there is little hope we can offer. Pensions are a very complicated but also very sensitive issue. Trade unions are very conservative. Nobody is ready to pick up the bill.
Compare this to the climate discussion: the inability to act now will only make things worse in the future.
Report of the Committee of Experts: An efficient and reliable social contract (Pensions Commission 2020-2040, June 2014)
Website of the Academic Pension Board: https://www.conseilacademiquepensions.be
Devolder P., J.Hindriks, E.Schokkaert, F.Vandenbroucke ( 2017)
Réforme des pensions légales : le système de pension à points Regards économiques, n°130, UCL
Devolder P., J.Hindriks ( 2018)
La pension à points : 5 principes pour plus d’équité dans les régimes de pension en Belgique Regards économiques, n°139, UCL Devolder P.( 2019) Une alternative à la pension à points : le compte individuel pension en euros Regards économiques, n°150, UCL
Devolder P. ( 2019)
Nouveaux horizons des retraites : des comptes notionnels à la répartition par points