The Pension Crisis
As life expectancy has increased, the aging population has started to erode Europe’s generous state pension system, leading the continent to face one of the most predictable crises of its history: the pension time bomb.
Europe’s state pension systems are based on simple premise that there are more employees than retirees – in other words, states pensions are a pay-it-forward scheme, in which the current working-age population pays for the retirement of the previous generation. Or at least that’s the theory. However, this no longer holds true. Since 1970, the average pension age in Belgium has fallen from 64 to 59, while the average life expectancy has increased from 68 to 80. This has significantly prolonged the payment of pensions, which, without reform, will present the welfare state with a funding crisis. According to the European Commission, currently 11% of GDP goes toward pensions in Belgium. Compared to the European average of 11.3%, Belgium is doing well. Unfortunately, Belgium belongs to the group of EU Member States where the increase in gross public pension expenditure is projected to be significant. By 2060, this figure will increase by 5.6%, while the European average is set to increase by only 1.5%.
Faced with increasing life expectancy, one might have expected the government to have raised the retirement age. In fact, the Belgian Government chose to do the opposite, developing generous early retirement schemes since the 1970s under the assumption that it would free up jobs for young people. Empirical studies have shown, however, that youth unemployment is actually worse in countries where early retirement schemes are prevalent.
There is little mystery as to why governments have been so slow to react to the looming pension crisis. Changes to public pension schemes are extremely unpopular with workers and voters, who all want to avoid the issue until their retirement plan is fixed in place, forcing the next generation to bear the burden. This cannot go on. The nature of the crisis means that it cannot be ignored, and that it will not simply resolve itself. Governments in Europe must act, and voters must accept change if the European welfare state is to survive.
Early exit in Belgium
In order to be entitled to a full state pension in Belgium, employees must be 65 years old or need 45 years of salaried work. Yet, early retirement is possible without penalty for salaried workers from the private sector on the condition that they have worked for 35 years. Until 1991, pensions were reduced by 5% for each year below the official retirement age. Marjan Maes, Assistant Professor at HUBrussels and Affiliated Researcher at KULeuven, believes that the abolition of the bonus-malus system in 1992 was every Belgian economist’s worst nightmare. If brought back, Maes believes that the effective retirement age would undoubtedly increase, alleviating some of the pressure on public finances. By removing the penalty system, the government took away any incentive for the Belgian population to remain in the workforce until the legally required age.
Additionally, systems like the ‘bridge pension’ have further encouraged workers to leave or stay out of the labor market at early ages. A bridge pension is effectively an unemployment benefit, which, unlike the standard unemployment benefit, does not decrease according to the length of time the recipient is jobless. It was offered to workers after the mass layoffs at Siemens Belgium in 2001 and Carrefour and Opel in 2010. In the case of Opel, the pre-pensions were granted from the age of 50 to 641 workers, 300 of whom were aged 50-52 at the time. Maes claims that 40% of all workers actually wanted to continue to work full time. Retirement in these cases is involuntary and unnecessary, but is an offer one cannot refuse when faced with the uncertainty of unemployment in an ageist society. Bridge pensions have also been criticized as being a state subsidy for redundancies as the government pays the benefit, while the employer only pays a supplement. In other words, the taxpayer foots the bill at a time when the aging population is already enough of a drain on public finances.
The bridge pension lives on, with some modifications, under the name ‘unemployment with company supplement’. Minister for Employment Monica De Coninck recently allowed 1,772 workers at Ford Genk over the age of 52 to claim a bridge pension when the factory closes at the end of 2014. This effectively sends the message that workers are unemployable at the age of 52 and reinforces discriminatory age stereotypes. Government measures not only provide no incentive to work longer, the government itself undermines these measures through its actions.
The practice of encouraging people into early retirement becomes even more questionable when an early exit from the labor market can lead to poverty amongst the elderly. In July 2013, the Minister for Pensions, Alexander De Croo, raised the lowest pension by 2% as it had been revealed that over 100,000 retirees over the age of 65 were living below the poverty line. This is an exceptionally high figure for a welfare state like Belgium.
The participation of older workers in the labor market is strongly conditioned by the national policy framework, in particular by the pension system, employment legislation, wage policies and the availability of education and training. Pension transformation will require new strategies and new ways of working. Modernizing existing systems and improving efficiencies and flexibility in the labor market are fundamental to responding to the crisis.
In order to counteract the effects of removing penalties for early retirement, the government introduced a bonus scheme in 2007. The logic behind the scheme is simply to reward people for working until the legal limit. People who remain in the workforce longer than required will receive a pension bonus of €1.50 per extra day worked on top of their monthly pension. This will increase by €0.20 every year with a cap set at €2.50. This means that a person who works an extra three years will receive an extra €83 a month. This scheme is therefore a rather feeble attempt to retain people in the workforce.
The Itinera Institute recommends providing workers with 50% of their pension from the age of 60, while steadily increasing the full pension age to 68 years by 2030. The Itinera Institute also recommends that the government provide supportive public policy for lifelong learning – a ‘Knowledge Lift’ – so that workers continue to have the skills that will allow them to progress in their career and, therefore, motivate them to remain in the active workforce longer.
Unfortunately, pension reform is not only a question of changing policies, but also changing mentalities, a point which was emphasized by Alexander De Croo at an event hosted by the Itinera Institute in September 2013. “When you ask an employee if people should work longer, he will say, ‘Yes, people should remain in the workforce longer…but not me, not in my lifetime.’”
For more of our policy recommendations, please refer to our Priorities for a Prosperous Belgium.