2014 : PENSION REFORM NEEDED
A recent study by Roland Berger Strategy Consultants put the cost of Belgium’s ageing population at nearly €300 billion with purchasing power kept constant. This equates to nearly three quarters of the annual wealth generated by Belgium. The calculations used data from the Ageing Population Commission (Commission du vieillissement) and a discount rate of 4%. Barring unforeseen socio-economic turmoil, this is a reliable, albeit worrying, figure.
The question is how to finance this immense cost in a spirit of solidarity and inter- and intra-generational justice. The foundations of the pension system have been crumbling under the impact of various demographic changes. These include widely differing professional and family lifestyles, falling birth rates, the massive entry of women into the workplace, and an ageing population (which the OECD estimates will structurally cut economic growth by 0.5-0.7%). We should remember that, looked at cynically, any pension system is a subsidy paid by those who live less long to those who live longer.
Other structural factors are superimposed on these sociological transformations. Our communities have deserted industry and flocked into the services economy and digitalised knowledge. Globalisation and the slump of the market economy have also exposed our economy's lack of competitiveness and the limitations of the welfare state model.
The Belgian pensions system can be viewed as trapping an entire generation. The relative number of years worked by pensioners or soon to be pensionable persons has fallen to the detriment of the workers in employment who have to bear the extra cost at a time when their number is shrinking.
There should be no illusion that the pensions problem is in any way limited solely to the question of its financing. The crux of the matter is the impoverishment of various classes of elderly persons and income disparities between pensioners. Factors like education levels, professional adaptability, family lifestyles, number of children and life expectancy also foster inequality. That is why fairness should exist between generations and within them, too. A qualified worker of any age has more chance of getting a job and saving money. He or she can decide to retire from professional life early whereas a less qualified worker is more likely to be excluded from entry into a trade. Inequalities between different categories of pensioners also occur because of a correlation of life expectancy with income levels and harsh working conditions.
We need to abandon the inaction of which we have all been guilty and tackle the pension financing issue in a clear-sighted and rigorous way. Solutions must be dynamic in nature as the problem needs resolving within an entire life cycle comprising periods of work and inactivity. The anticipated ageing of the population cannot be financed solely by the increased pension contributions of workers in employment. Nor can we just shift the cost of ageing onto pensioners by lowering pension benefits.
A balance is needed between the generations along the lines proposed by the American economist, Richard Musgrave. Adopted by numerous countries, the Musgrave rule recommends that the income of workers in employment and pensioners is kept stable, as though the status quo were societally "fair". Also called the rule of fixed relative positions, the Musgrave rule dictates that the ratio of income per head of working population (after deducting pension contributions) to benefits per head of the retired population (after deducting tax) is kept constant. Once a ratio is established, the contribution payment rates and pension benefit amounts are periodically updated to allow for changes in demographics and productivity. To maintain the Musgrave ratio, contributory payments by employed workers will have to be increased and the pensions of workers not in employment simultaneously lowered. It is a massive, permanent balancing act over time, with contribution payments and pensions adjusted along the way.
In practical terms, this objective should lead to the improved employability of young persons, longer working lives and a higher rate of older workers in employment, particularly in Belgium. It turns out that pensions would apparently be fully funded if everyone worked until the age of 65. However, it would be politically dishonest to arbitrarily raise the percentage of older workers in employment. This option is ruled out by recent economic and technological upheavals and by skills erosion. The pension age would be extended not with the aim of putting older workers into employment but to reduce their pension benefits. It would be a case of applying the same logic to pensions as that used for reducing delays on SNCB trains: adjusting train journey times to accommodate the lack of timeliness instead of ensuring train punctuality.
In conclusion, the pensions problem is solvable not by market forces but within an economic policy framework. The pensions equation will be solved by the improved employability of workers, which is a function of their continued professional training and job recycling. Also needed is a flexible transition to a system combining individual capitalization and collective pay-as-you-go pensions, with group insurance and pension funds as the second pillar, and private pensions savings as the third. In this regard, it is imperative that tax breaks for the third pillar be raised higher. But it would be misleading to give the impression that the third pillar is a substitute for declining statutory pensions.
