Employee Benefits
AG EB ONLINE
Published on 21/01/2021
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What does 2021 have in store for pensions – for you and your employees?
The pandemic has wreaked havoc on every part of the economy and left many people uncertain about the future, including when it comes to their pensions. So we asked Jean Hindriks, Head of the Economics School of Louvain and member of the Expert Commission for Pension Reform 2020-2040, for his take on the current state of play and what the future might hold for the statutory pension.
The pandemic has wreaked havoc on every part of the economy and left many people uncertain about the future, including when it comes to their pensions. So we asked Jean Hindriks, Head of the Economics School of Louvain and member of the Expert Commission for Pension Reform 2020-2040, for his take on the current state of play and what the future might hold for the statutory pension.
What is the current state of play as regards the statutory pension in Belgium? Can you shed light on what is a rather technical subject?
Before the COVID-19 pandemic struck, I wrote a briefing paper outlining the urgent need for reform of the Belgian pension system.
Our country is facing a
structural emergency. As population ageing gathers pace, more and more working-age people are retiring and living off their pensions. What that means is that we’re in the midst of a “pension crisis”. It’s happening right now, before our very eyes.
Can you explain what these structural problems are?
You only have to look at the numbers to see where the problem lies. It’s quite straightforward, really. Pension expenditures are growing at twice the rate of GDP and social security contributions. On average, pension expenditures are increasing by 6% year on year.
In practical terms, this means that the annual cost of servicing pensions is now over
€15 billion higher than it was 10 years ago. Of that difference, €11 billion – a full three-quarters – is due to pension indexation, while the remainder - €4 billion - stems from the fact that there are more pensioners. In short, pension expenditures are set to continue rising. There are
three structural factors behind this: pension levels are rising due to indexation, the number of pensioners is increasing and people are living longer.
I get the sense that our leaders haven’t fully grasped what’s happening. I hear a lot of talk about 2040 as a target date. But by then, it’ll be too late.
We have to act now, not put the issue off until some abstract date in the future.
How is the government planning to address these structural problems?
The current proposal is to increase the minimum pension by 22%, for more than 700,000 members. But you have to wonder whether that’s credible, given what I’ve already said about the massive structural deficit in the system. And in fact, it isn’t credible precisely because it’s unaffordable.
By raising the statutory pension, you remove some of the incentive to pay into a complementary pension scheme. In other words, you encourage people to pin all their hopes on the statutory pension – the very system that’s vulnerable to population ageing and political risk. The government is free to change the eligibility rules and pension level as it sees fit. In that sense, our pensions are something of a political lottery.
If we do take this course,
we owe it our workers and young people to explain how we’re going to pay for it. The government’s strategy may be clear, but pension funding is the elephant in the room.
To my mind, it’s the big question that needs addressing. The government has never tackled the issue of pension funding head on. So that’s the first question I’d ask the new minister. To put it bluntly, it’s time to dispense with the political rhetoric.
We’re living through a major economic crisis. We need to invest in health care and in getting the economy back on its feet. So how can we fund a pension system that, for structural reasons, is costing 6% more to service year on year?
“Structural factors mean pension expenditures are set to continue rising”
The previous administration set in motion plans to raise the retirement age to 67 years by 2030. Do you think the new pensions minister will follow suit? Would doing so solve the problems with the system?
I think the proposal is very much in the realms of the hypothetical. The structural problems will still be there in 2025 and in 2030, when the retirement age increases to 66 and 67 years respectively. All it does is
kick the can down the road. We need to act now. What strikes me is that, amid all the talk of raising the retirement age, the government is removing the incentives for people to work longer – like abolishing the retirement bonus and bringing in end-of-career measures that encourage Belgians to retire early instead of staying in work. People are rational. You can’t blame them for taking advantage of the system.
Retiring early has almost no effect on the statutory pension, so it’s no wonder people grab the opportunity with both hands.
You are a member of the Academic Council on Pensions. How is your body proposing to restore balance to the pension system?
Our proposal is straightforward:
to reinstate the measures that encourage people to stay in work. What this means, in practice, is a return to the bonus-and-penalty system.
People need to be willing and able to work for longer. First, we make people “willing” to stay in work by rewarding those who retire later, and by penalising those who take early retirement. Second, we make people “able” to continue working by providing training and retraining opportunities in later life. And we should be abolishing the long-service bonus, which acts as a symbolic cut-off point for people’s careers. The Nordic countries have done just that, and they now have the highest share of over-55s in work in Europe.
The new pensions minister is planning to introduce reforms in September 2021. One of the headline measures in the forthcoming Federal Government agreement is to raise the net minimum statutory pension to €1,500. What do you make of the proposals?
Aside from increasing the minimum statutory pension to €1,500, the proposals aren’t much to write home about. But again, I come back to the same question:
how are we going to pay for it?
I think there’s scope for meaningful pension reform in the near term. It’s not like we’re starting from scratch. Why not introduce an individual retirement account as a credible and reasonable alternative to the points-based system? You could have a smartphone app showing the balance of your complementary and statutory pensions. That would instil confidence, foster transparency and give people a sense of ownership. They’d be able to track changes in their pension entitlements over time. And it would provide much-needed certainty for workers.
At the Academic Council on Pensions, we’ve emphasised two aspects:
widening eligibility and the minimum statutory pension.
Did you know that there are
seven minimum pension schemes in Belgium? I won’t list them all here. But with so many different schemes, how are people expected to find their way around?
The Council is clear that the minimum pension schemes need to be simplified and harmonised. We also need a pension system that’s fit for the realities of modern life, at a time when more people are switching careers and combining employment and self-employment, when more women are entering the job market, when more people are living in dual-income households and blended families, and – crucially – when workers are looking to retire gradually.
“Belgium’s pension schemes need to be simplified and harmonised to re-instil confidence in the system”
When you say pension schemes need to be harmonised, what exactly do you mean? Are, say, self-employed workers and civil servants really treated that differently?
So yes, we need standardised rules on eligibility and how guaranteed minimum pensions are calculated. The same applies to maximum pensions.
If we’re worried about the cost of servicing minimum pensions, why not lower maximum pensions?
When you say pension schemes need to be harmonised, what exactly do you mean? Are, say, self-employed workers and civil servants really treated that differently?
Absolutely. The maximum statutory pension for a civil servant is €6,283, whereas the caps for wage earners and the self-employed people are set at €2,145 and €1,627 respectively. That’s a huge difference – and it’s hard to justify.
So yes, we need standardised rules on eligibility and how guaranteed minimum pensions are calculated. The same applies to maximum pensions.
If we’re worried about the cost of servicing minimum pensions, why not lower maximum pensions?
What I mean is, by placing so much emphasis on the €1,500 minimum pension, we’re looking in the wrong place. The real issue is the fact that we have
seven different pension schemes, with overly complex and subjective rules. But people aren’t up to speed on the details.
How would you summarise the current state of play as regards the statutory pension in Belgium?
I’d say it boils down to three issues – what I like to call the
“three Cs”:
“Credibility”: the government must come clean about how we’re going to fund the statutory pension – including promised index-linked increases – with an ageing population and at a time of major economic crisis.
“Confusion”: the pension schemes and eligibility criteria need to be simplified and harmonised.
“Confidence”: an individual pension account would give people much-needed certainty and allow them to track their pension entitlements in real time.
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Who is Jean Hindriks?
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