Do pension reforms go far enough?

The Belgian Study Commission on Ageing published its annual report in October 2012. The report looked in particular at the effect of recent reforms on pension regulations. Although the reforms cut the number of retired workers by 66,000, the budgetary impact appears to be limited. In spite of the changes, the report predicts the costs of supporting the retired and elderly will continue to increase as a proportion of Belgium’s gross domestic product. It seems clear additional measures will be needed.

Reform of pension regulations

The Belgian government headed by Elio Di Rupa agreed in December 2011, shortly after taking office, on a structural reform of pension regulations in the country. The age at which workers are able to retire on a state pension, and the minimum age for early retirement were increased. Pension calculations were also changed, while the conditions governing the early retirement with an enterprise bonus scheme (RCC) – used in cases where business restructuring is taking place – were tightened.

The 2012 annual report of the Study Commission on Ageing (in Belgian) predicts that the reforms would cut the number of retired people by about 66,000 and, by 2060, would increase the number of people aged between 55 and 64 still working to 56.3%. .

Outlook for 2011–2060

The Study Commission’s report predicts that the cost of supporting Belgium’s elderly will rise from 25.3% of gross domestic product (GDP) in 2011 to 31.4% of GDP in 2060. These costs include not only pensions, but also expenditure on healthcare, unemployment and social expenses such as disability, early retirement and family allowances.

In spite of the reforms of December 2011, costs are forecast to continue to rise steeply. As well as the downward effect of an increasing retirement age, the reform has also had an upward effect on the mean levels of retirement pensions. This has come about as a result of people having to work for longer, higher pension bonuses, and an increase in the number of self-employed people receiving minimum retirement pay.

Poverty risk and the elderly

The report states that poverty risk for retired workers is higher than for the employed (16.1% against 4.5%), but lower than for the unemployed (30.4%) or the economically inactive (24.5%).

However, it also outlines a number of other factors that must also be considered when looking at the poverty risk of retired people. The concept of income takes no account of the advantages of home ownership, which retired people may well enjoy, or of advantages in kind such as free public transport and help with healthcare costs. When those factors are taken into account, the poverty risk falls to 11.6% among the over-65s, compared to 13.7% in the rest of the population. Single people, women and the very old are the most vulnerable retirees.

The long-term prospects show a decreasing poverty risk for retired persons between 2011 and 2050. This can be explained by the upgrading of the minimum guaranteed income for the elderly (IGO-Grapa) between 2004 and 2007 (BE0404301N), as well as the increase in the number of years women are likely to work and the resulting rise in their retirement pensions.

Recent reforms of pension regulations, which postpone retirement and extend careers, have further contributed to the reduction of the poverty risk.

European Commission’s 2012 Ageing Report

The European Commission’s 2012 Ageing Report suggests that the long-term prospects for Belgian ageing costs are significantly higher than the predictions made by Belgian Study Commission on Ageing.

The difference between the two reports can be explained mainly as a consequence of other macroeconomic hypotheses. The EC’s 2012 Ageing Report of May 2012 did not take into account the effects of the structural reforms announced in December 2011. It should also be noted that in comparison to the the Belgian Study Commission’s report, the EC’s report assumes Belgium’s population will age faster and that its economic growth will be less dependent on job creation.

Commentary

The report of the Belgian Study Commission on Ageing shows that recent reforms are not sufficient to slow the increase of the budgetary costs of ageing. In an article in De Standaard on 13 October 2012, Professor Yves Stevens and Professor Jos Berghman from the University of Leuven, make some suggestions from an academic point of view.

In the article, the academics say research has shown the pension bonus will have only a minimal effect, despite being intended to stimulate longer careers and increase pensions if workers continued to work beyond the age of 62. The bonus, they say, should be effective only from the moment a person can effectively retire (after 40 years in work). A possible improvement to the system would be a bonus increase for each additional year of paid work.

The professors say supplementary pensions, such as company pension insurances or company pension schemes, are a form of extra-legal benefit. However, it is sometimes more advantageous to the worker to take such pensions at the age of 60 rather than 65 and they may even stimulate early retirement. Tax-efficient premiums should not be possible in case of early retirement.

An increase in retirement age was not needed for the moment, according to Stevens and Berghman. Encouraging all employees to work to the age of 65, or for a minimum of 45 years, would be more efficient.

They also questioned the system of ‘equivalent periods’, where spells of illness, unemployment and career interruption were counted in the calculation of a person’s pension. The professors say there should be a maximum number of ‘equivalent’ days. They say blue-collar workers and women would be most affected by the equivalent periods system as they are the ones with a higher number of equivalent days. Introducing a maximum number could raise their poverty risk.

Longer careers and the pension bonus system, according to Stevens and Berghman, cause an increase in average retirement pay. Furthermore, they say the increased participation of women in the labour market has increased the number of two-earner households. In the longer term, this will most probably create opportunities for more radical changes to the pension system.

Caroline Vermandere, HIVA-KU Leuven