Belgium: Selected Background Issues

This Selected Background Issues paper analyzes sectoral wage differentiation and labor cost issues in Belgium. The paper discusses wage dispersion across sectors in Belgium and compares it with the pattern in other European countries. It analyzes the data for the Organization for Economic Cooperation and Development used in the Central Economic Council assessment of competitiveness, underscoring the role of social security contributions and restrictions on part-time work in the evolution of labor costs per employee. The paper also examines trends in saving and investment, and the pension reform in Belgium.

Abstract

This Selected Background Issues paper analyzes sectoral wage differentiation and labor cost issues in Belgium. The paper discusses wage dispersion across sectors in Belgium and compares it with the pattern in other European countries. It analyzes the data for the Organization for Economic Cooperation and Development used in the Central Economic Council assessment of competitiveness, underscoring the role of social security contributions and restrictions on part-time work in the evolution of labor costs per employee. The paper also examines trends in saving and investment, and the pension reform in Belgium.

III. Pension Reform in Belgium 1/

1. Introduction

This paper reviews the financial implications of the ageing population for the pension system in Belgium in the period 1995-2050. After documenting the institutional particularities of the Belgian pension system, we present simulation results illustrating the effect of the demographic evolution on pension expenditures, based on the current rules governing the pay-as-you-go pension system in Belgium. Different reform options are discussed and their financial impact on the trajectory of pension expenditures is analyzed.

In this study, the focus is on regular retirement pensions in the public and private sector. Although this includes the majority of pensions paid in Belgium, it leaves out disability pensions as well as pensions paid to the self-employed and through early retirement and minimum income schemes. The scheme for the self-employed is relatively small in magnitude, while early retirement schemes are, by definition, self-liquidating since beneficiaries in those schemes revert to the regular retirement schemes once they reach the official retirement age. 2/ An important component not covered is the survivor’s pension paid to widows and widowers of deceased pensioners. Currently, those pensions account for about 30 percent of all expenditures in the private sector scheme. Their evolution is difficult to gauge since it depends on changes in female labor participation rates, the evolution of life expectancy for men and women, and changes in social structures. On balance, however, they can also be expected to grow substantially. 3/

The next section reports on projected key elements in the demographics of Belgium over the next half century. Section 3 provides some detail on the structure of the private and public sector pension schemes, followed by the simulation results in section 4. Section 5 presents some reform options and their impact on the financial sustainability of the pension system in Belgium. Section 6 presents the main conclusions of the paper.

2. Population dynamics in Belgium

Belgium, like most other industrialized countries, is facing a steady aging of its population over the next half century. Rising life expectancy and lower fertility rates, combined with declining net immigration, are expected to lead to significant changes in the structure of the Belgian population.

Table 1 presents demographic projections through the year 2050 from a recent study on this subject (Institut National des Statistiques 1993). Although the population remains almost constant over the next 50 years, the share of the elderly rises sharply from some 16 percent in 1995 to over 26 percent of the total population in 2050. This increase is almost entirely due to a fall in the working-age population; the school-age population also declines, albeit modestly. Hence, the elderly dependency ratio increases markedly, doubling over the next 55 years from 26 percent in 1995 to 51 percent in 2050, with a peak at more than 52 percent in 2040. 4/

Table 1:

Demographic Projections

Source: National institute for statistics, Bevolkingsvooruitzichten 1992-2050, (1993)

Chart 1 illustrates that this demographic evolution is not untypical among major industrialized countries. In fact, the evolution is somewhat less dramatic in Belgium, since already in 1990 it had the highest elderly dependency ratio of this group of countries. This remains the case until 2000 when this ratio becomes close to the average for France, Germany, Italy, Japan and the united States. Nevertheless, the fact that Belgium deteriorates somewhat less initially should not detract from the very serious implications that the doubling of the elderly dependency ratio will undoubtedly pose for the social security system in Belgium, in particular with regard to pension expenditures.

CHART 1
CHART 1

BELGIUM: Elderly Dependency Ratio 1/

(International Comparison)

Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A003

Sources: IBRD, World Bank Population Projections (1994); and NIS, Bevolkingsvooruitzichten 1992-2050 (1993).1/ Population over 65 divided by working age population.

In the next section, we briefly discuss the organization of the Belgian pension system before presenting simulation results in section 4.

3. The organization of the Belgian pension system

All Belgian pensioners receive their benefits on a pay-as-you-go basis, i.e. the contributions of currently employed persons are used to pay for the pensions of current beneficiaries. There are four major schemes through which pensions are paid out: for civil servants, for private sector employees, for the self-employed, and a guaranteed minimum income scheme. Although these schemes operate under quite different rules for benefits and contributions (see below), they are all characterized by heavy government involvement. 5/ Private retirement accounts are available in Belgium, but these have so far been negligible in size; only 5 percent of the working population holds a private retirement account.

The following account presents the main relevant features of the operation of the scheme governing the pensions of private sector employees and public sector employees, the main focus of our study. 6/

a. Private sector pensions

The pensions’ of private sector employees depend on (1) salary during an entire career, (2) length of career, and (3) marital status when retired. Pensionable earnings are also subject to a maximum ceiling, but there is no ceiling on contributions. Employees in the private sector earn a pension based upon their average salary during their whole career. Actual salaries are used to calculate the pension, although an imputed salary is used for spells of illness, unemployment, other career breaks, and for employment during the post-war period until approximately 1955. During 1955-75, this life-time salary was revalued on an ad hoc basis, keeping pace with consumer price inflation. After 1975, past salaries are automatically indexed to the consumer price index. 7/

Private sector employees can retire when they reach age 60. Men receive a full pension if they have worked for 45 years, women if they have worked for 40 years. If they have not worked for 45 years (40 years for women), the pension is prorated. 8/ The pension is then calculated as a percentage of the average salary base. Married pensioners with only one pension in the household receive 75 percent of the average salary. Single pensioners, pensioners in a household with more than one pension, and survivor’s pensions receive 60 percent. In case of multiple pensions, rules of aggregation implying a downward adjustment are in force. 9/

Finally, in 1993 the ceiling on all labor income taken as a basis for the calculation of pensions was BF 1,314,288. This ceiling is automatically indexed to consumer prices. In addition, the ceiling has been adjusted on a discretionary basis to incorporate real growth in the economy. Since 1982, the ceiling has only been increased for price changes.

Private sector pensions are paid out of a social security fund that is funded through social security contributions on labor income and government transfers. In contrast to benefits, there is no limit on the contributions. Since 1983, employees contribute 7.5 percent from their gross income to the social security fund and employers add another 8.86 percent to this fund. In 1991, the government contributed BF 193 billion, a little less than 3 percent of GDP, to the social security fund and has committed itself to keep transferring the same amount (not indexed) annually. This government transfer is used to cover shortfalls in the different “pillars” of the system—health insurance, unemployment benefits, family allowances, and private sector employees’ pensions—according to need.

b. Civil servants’ pensions

Public sector pensions are paid out of the general government budget. 10/ The mandatory retirement age is 65 for men and women with at least 20 years of employment. There are many regulations that allow for retirement before 65, depending upon the specific government sector (military, judicial system, etc.) The retirement pension depends upon (1) the reference salary, (2) the career length, and (3) the tantieme and is subject to a maximum. The tantieme is the benefit accrual factor which converts the career length into the nominal replacement rate. The following formula is used for the pension calculation:

Pension = reference salary * years worked * tantième

For most government sectors, the reference salary is the average pay scale, at the time of retirement and indexed, applicable during the last five years of the career. The career length is determined by the years of employment as a permanent civil servant. Certain other types of contracts, when followed by a contract as a permanent civil servant, are also taken into account. The basic tantieme is 1/60—but many government employees enjoy a more favorable tantieme, ranging from 1/30 for university personnel to 1/50 for primary school teachers. For the basic tantieme, the maximum applicable ratio is 45/60.

There are relative and absolute limits on civil servants’ pensions. The maximum pension is 75 percent of the reference salary with a ceiling in 1995 of BF 2,172,473 per annum. In 1995, the minimum pension for a single government employee was BF 411,054 and for a married civil servant BF 513,818.

Since civil servants’ pensions are paid out of the general government budget, no social security fund, as such, is built up over time to meet their pensions: 7.5 percent is deducted from the gross income of civil servants and the government bridges the difference between current benefits and contributions.

It is clear that civil servants receive more generous pension benefits than their private sector counterparts. Not only are their contributions lower: their benefits are subjected to a higher ceiling, and are based upon higher reference salaries (last 5 years of their career, compared to the entire career in the private sector scheme). Moreover, the peréquation system implies that current pensioners share not only in the economic growth during their working life but also during their retirement, since any increase in salary for civil servants of a certain rank leads to a similar increase in the pension of retired civil servants with the same rank.

Before presenting the simulation results, it is worth noting that, in contrast to the practice in some other industrialized countries, there are no limits on the maximum contributions levied on salaries, in the private as well as the public sector. Contributions are a fixed percentage of gross wages without any ceiling on the maximum wage that can be taken into account.

4. Baseline Simulation

Table 2 summarizes the main demographic and macroeconomic assumptions underlying the baseline simulation.

Table 2.

Baseline Assumptions

The demographic assumptions imply a steady increase in the life expectancy for men and women, a slower rate of immigration, and a steady-state fertility of 1.85 children per woman. The developments described in Table 1 are based upon those assumptions. The productivity growth assumption of 1.5 percent per year, based upon OECD estimates for total factor productivity over the past 20 years, and the assumption of no new net job creation over the next 55 years, imply an average real GDP growth of 1.5 percent per year. Women are expected to continue increasing their participation in the labor force.

Table 3 illustrates the most important macroeconomic developments projected for 1995-2050 based upon the assumptions summarized in Table 2. Real GDP growth averages around 1.5 percent over the next half century, based upon average productivity gains on the order of 1.5 percent per year and no net employment creation. The participation of women in the labor force increases from 49.6 percent in 1995 to 55.2 percent in 2050. The participation rate for men is assumed to decline slightly to 70 percent in 2050. The inflation rate is assumed to be 2 percent per year and the real interest rate is kept constant at 3.5 percent. Changes in the real interest rate have no contemporaneous effects on primary pension expenditures or revenue but are crucial for calculating interest receipts or payments on the net asset position of the pension fund and the net present value of future pension liabilities. 11/

Table 3:

Macroeconomic Projections

Source: Staff’s simulations.Notes: All figures in percentage change per year, except for labor force participation and the real interest rate.

Table 4 summarizes the developments in expenditures and revenue for the pension system until 2050. For the private sector, revenue is kept at a constant 4.5 percent of GDP, the level that balances the pension system in 1995. This revenue level is based upon the contributions during 1995 and the government transfers necessary to achieve financial equilibrium in the pension scheme for the private sector in 1995.

Table 4:

Baseline Projections for Pension System during 1995–2050

Source: staff’s simulations.

Private sector pension expenditures rise substantially from 4.5 percent in 1995 to 5.4 percent in 2010 and continue to rise to 6.7 percent in 2030. This is the period when the “baby-boom generation” reaches retirement age. The shortfall of the private sector pension scheme similarly rises to 2.2 percent in the year 2030 before declining to 1.2 percent of GDP in 2050.

Private sector pension expenditures rise substantially from 4.5 percent in 1995 to 5.4 percent in 2010 and continue to rise to 6.7 percent in 2030. This is the period when the “baby-boom generation” reaches retirement age. The shortfall of the private sector pension scheme similarly rises to 2.2 percent in the year 2030 before declining to 1.2 percent of GDP in 2050.

Two underlying trends that drive this evolution of pension expenditures in the Belgian private sector are illustrated in Table 5. First, the demographic evolution leads to a precipitous fall in the support ratio—the number of employees per pensioner in any given year. This ratio drops dramatically from 2.4 in 1995 to 1.2 in 2050. The low ceiling of private sector pensions and its indexation to prices and not wages, however, exercise a strong dampening effect, even under the conservative growth assumption of around 1.5 percent. Economic growth raises average wages at the same rate in our model since no employment is created on a net basis, but a larger fraction of employees are affected by the ceiling on pensionable earnings upon retirement. Hence, the average pension paid out in any given year rises at a much slower rate than the average salary.

Table 5:

Developments in the Pension System in the Baseline Scenario

Source: Staff’s simulations.Note: Number of pensioners and employees in thousands; the support ratio is the number of employees divided by the number of pensioners; average pension and wage in thousands of 1995 Belgian francs; the replacement rate is the average pension divided by the average wage.

In 1995, this replacement rate—the average pension divided by the average wage—stood at 35.4 percent. As can be noted in this Table 5, this ratio drops continuously to 22.6 percent in 2050, and its evolution is independent of demographic patterns.

Public sector pensions expenditures, however, show a quite different pattern. Although public pensioners account for only 29 percent of the population receiving a pension, their more generous retirement package and more favorable indexation mechanism leads to ballooning expenditures over the next 55 years. Table 4 indicates that pension expenditures for the public sector will more than double over the next decades from 2.1 percent of GDP in 1995 to 4.5 percent in 2040. Due to continuous standard-of-living adjustments (peréquation) and the absence of a strong ceiling effect, this rate does not decline after the peak of the demographic shock. In our scenario, this implies that their replacement rate even rises slightly from 54.7 percent in 1995 to 60.4 percent in 2020 and continues to rise afterwards (see Table 5). Given the assumption that revenues, as a percentage of GDP, are kept constant at the 1995 level, the pattern of public sector pensions leads to a maximum annual shortfall of 2.3 percent of GDP in the public sector pension scheme in 2040 and remains constant subsequently. 12/

If we consider the pensions for private sector employees and civil servants together, the overall evolution of retirement pension expenditures for employees in the public and private sector shows a continuing rise from 6.6 percent in 1995 to around 11 percent in 2030. Subsequently, they stabilize at this new level. The net present value of net future pension liabilities for the private and public sector amount to 39.6 and 38.3 percent of GDP respectively. Alternatively, if all net liabilities were financed through debt, the stock of debt would be around 250 percent of GDP in 2050 (see Table 4). 13/ 14/

Before analyzing some policy options that could be implemented to correct this emerging financing problem, it is useful to explore the sensitivity of the results to changes in the projected values for demographic and macroeconomic fundamentals. In order to test the sensitivity of the above conclusions to alternative demographic scenarios, a simulation has also been prepared based on an alternative demographic projection put forward by the National Institute for Statistics. These projections assume a lower fertility rate, the same mortality rate and a higher rate of immigration. The results, reported in Panel A of Table 6, have an effect of up to 0.9 percent of GDP on the annual financial deficit of the pension system, compared to the baseline scenario. The largest differences, not surprisingly, arise at the end of the forecasting period.

Table 6:

Sensitivity Analysis of Baseline Scenario

Source: Staff’s simulations.Notes: Panel A presents simulation results for a lower fertility rate, the same mortality rate and a higher net immigration rate. Panel A assumes a rate of productivity growth of 2.25 percent. Panel C reoprts the results assuming net employment creation in the private sector and Panel D calculates the pension debt for a real interest rate of 4.5 percent.

Although these differences are relatively minor over the next 25 years, they do significantly increase the net future value of net pension liabilities: they rise for the private and public pension system to 154.3 and 142.7 percent of GDP respectively.

Panels B through D of Table 6 illustrate the sensitivity of the projections to the macroeconomic framework. Panel B assumes a higher growth rate, as a consequence of more robust productivity growth. The results in Panel C are based upon positive net job creation over the next 55 years. Panel D entertains the assumption of a one percent higher interest rate. The results are not surprising. Stronger growth, whether through productivity improvements or higher employment, improves the viability of the system substantially. Private sector pension expenditures barely pose a problem because the ceiling, which is only indexed to CPI inflation, “bites” even more rapidly in this case. 15/ A higher real interest rate has no effect on the primary balance of both pension systems but has draconian effects on the interest payments to finance shortfalls. The stock of debt in 2050 rises by 68 percent of GDP from 250 percent of GDP in the baseline scenario to 318 percent of GDP with a higher real interest rate. The net present value in 1995 of net future liabilities drops of course—to 64 percent of GDP for both systems combined.

5. Options for Reform

This section describes four different policy alternatives that could contribute to contain the steady rise of pension expenditures over the next 50 years. It is important to note that, despite the uncertainty concerning macroeconomic, social and demographic factors, these reform options are robust to the underlying assumptions, in that they are unaffected in their qualitative effect on pension expenditures. Their quantitative effect on. the viability of the pension system will, of course, be influenced by different macroeconomic and demographic patterns.

The first policy option considered is an adjustment of the indexation mechanism for pension ceilings in the private sector. The second policy option considered is abolishing the “peréquation” for public sector employees, so that the indexation of existing pensions is based only on developments in the consumer price index, not wages. The third policy option considered is the impact of calculating civil servants’ pensions according to the rules governing private sector pensions. Specifically, the peréquation is abolished (as in the previous policy option) and public sector pensions are based on the salary during the entire career, not the last five years. Finally, the impact of raising the retirement age to 65 years and eliminating the gender bias in the calculation of the pension is explored.

All of the reform measures are based upon the demographic and macroeconomic assumptions underlying the baseline scenario except for the specific changes indicated below.

a. Policy measure 1: Partial adjustment of the ceiling for private sector pension to inflation

One of the reform options that could be considered is a gradual decline of the ceiling governing private sector pensions. For illustrative purposes, we consider a scenario where this ceiling is only adjusted for 80 percent of any increases in the consumer price index. Table 7 reports the financial impact of such a measure on pension expenditures over the next 50 years.

Table 7:

Partial Adjustment of Ceiling for Private Sector Pensions to Inflation

Source: Staff’s simulations.Notes: In this scenario all assumptions of the baseline scenario are maintained except for the ceiling of private sector pensions which is now indexed to only 80 percent of inflation.

Since this measure does not affect public sector pensions, the figures for the public sector component are unchanged from the baseline scenario. Initially, the effect is rather limited on total primary expenditures for private sector pensions, on the order of 0.1 percent of GDP per year until 2010 vis-à-vis the baseline scenario. Afterwards, the impact of this measure increases to peak at 0.8 percent of GDP annually in 2050, again measured against the baseline scenario. Hence, the stock of debt incurred from shortfalls in the private sector pension scheme falls from 127.4 percent of GDP in 2050 in the baseline scenario to 100.6 percent.

The impact of this measure—little initially and gradually increasing, independent of the demographic evolution—results from its effect on the number of retirees whose pension hits the maximum ceiling on pensions, and its cumulative nature—i.e. every year the ceiling is only adjusted for 80 percent of consumer price inflation.

b. Policy measure 2: Adjustment of public sector pensions only to inflation

As is apparent from the results in the baseline scenario, the public sector pension scheme is substantially more generous than the scheme governing private sector pensions. In this reform option, presented in Table 8, the peréquation of existing pensions is abolished. Pensions are now indexed to changes in the CPI, no longer to wage increases.

Table 8:

Adjustment of Public Sector Pensions to Inflation Only

Source: staff’s simulations.Notes: In this scenario all assumptions of the baseline scenario are maintained except for the “perequation” of public sector pensions. Public sector pensions are now indexed to inflation and no longer to nominal wages.

Since none of these measures affect private sector pensions, the results for that sector of the pension system, reported in Table 8, are not different from the baseline scenario. The effect on public sector pensions is, however, dramatic. While expenditures for public pensions rose to 4.4 percent in 2050 in the baseline scenario, they are 0.7 percent lower in 2050 in this scenario and the annual shortfall in the public sector pension scheme drops to 1.6 percent of GDP in 2050 compared to 2.3 percent in the baseline scenario. The accumulated debt in 2050 is correspondingly reduced from 123.1 percent of GDP for public sector pensions in the baseline scenario to 81.3 percent of GDP for public sector pensions in this scenario.

c. Policy measure 3: Harmonization of the calculation of public and private sector pensions

In this section, the previous option is taken one step further and the impact of calculating public sector pensions according to the same rules as private sector pensions is analyzed. In addition to abolishing the peréquation, as explored in the previous option, public pension benefits are now calculated on the basis of the entire wage history for civil servants, as in the private sector, and no longer on the wages during the last five years of their career. The reference salary is also revalued based on price, not wage increases.

The results, reported in Table 9, indicate that this measure significantly reduces the burden of public sector pensions. 16/ Pension expenditures for the public sector drop immediately by 0.3 percent of GDP because of the abolishment of the peréquation. Until 2010, the impact of this measure is large compared to the baseline scenario but limited compared to the previous scenario when only the peréquation was abolished. After 2010, however, expenditures for public pensions grow at a substantially slower rate and are reduced by about 1 percent on an annual basis by 2030. In addition, expenditures drop in line with private sector pensions after 2030 unlike in the baseline scenario where the peréquation and a high ceiling led to a continuing increase in public sector pension expenditures. The impact on the accumulated debt by the year 2050 is quite dramatic: it now stands at 59.5 percent of GDP in 2050 compared to 123.1 percent in the same year in the baseline scenario.

Table 9:

Harmonization of Private and Public Sector Pensions

Source: Staff’s simulations.Notes: In this scenario all assumptions of the baseline scenario are maintained except for the (1) abolishment of the perequation, and (2) the calculation of public sector pensions based upon the entire career length.

d. Policy measure 4: An increase in the retirement age for men and women and in the reference period for women’s pensions

This last policy option increases the retirement age for men and women working in the private and public sector to 65 years, and raises the qualifying period for women working in the private sector to receive a full pension to 45 years. Currently, men in the private sector can retire at any time between 60 and 65 years and are entitled to a full pension after 45 years of. service. Women, who can also retire once they turn 60, receive a full pension based upon 40 working years in the private sector.

Overall expenditures drop significantly once these changes are adopted (see Table 10). Pension expenditures peak at 9.5 percent of GDP per year in 2030, compared to 11 percent of GDP in the baseline scenario, with the decline evenly spread between the public and private sector pension schemes. The effect on the accumulated debt in 2050 is very significant: the accumulated debt in the baseline scenario (250 percent of GDP in 2050) falls to around 100 percent in the same year, once the changes in this scenario are instituted.

Table 10:

Higher Retirement Age and Longer Career Length

Source: Staff’s simulations.Notes: In this scenario all assumptions of the baseline scenario are maintained except for (1) a retirement age of 65 years for men and women and (2) a 45 year career length for women.

6. Concluding Remarks

This paper highlights the strains that the aging of the population will put on the Belgian pension system over the next 50 years. It also illustrates that the problems, while serious, are manageable—both in absolute size and in comparison with other industrialized countries. Part of the reason for this result is that labor market participation in Belgium is currently so low—and, correspondingly, the elderly dependency ratio so high—that any return to labor market participation and unemployment rates seen in other industrialized countries will soften the demographic impact on pension expenditures. This underscores the critical contribution to the public finances that could be made by policy measures that would strengthen labor market performance in Belgium over the coming years. In addition, the absence of a ceiling on contributions maintains a strong financing base for the pension schemes.

Under all circumstances, however, the financial strains are severe: they should be tackled urgently to safeguard the financial viability of the pension system. In that regard it is important to reiterate that the present study only considers retirement pensions and does not deal with survivor’s pensions. Those pensions currently account for about 30 percent of private sector pension expenditures and will continue to be of major importance over the next 50 years. If those are taken into account, they will certainly add to the pension burden by several percentages of GDP.

The reform options discussed above would all contribute towards restoring the financial viability of the pension system in Belgium. None of them can eliminate the shortfalls completely by itself; a combination of measures will be required to maintain the system. Some of them, such as eliminating the peréquation for public sector pensions, would have an immediate impact on pension expenditures. Others, such as changing the reference period for pension calculations, will only generate tangible financial gains over the medium term (unless implemented retroactively). Implementing such changes as early as possible is thus of paramount importance to ensure that they have their full financial impact by the time the baby boom generation reaches retirement age.

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1/

This background paper was prepared by Etienne de Callatay and Bart Turtelboom.

2/

To the extent that early retirement schemes were implemented to relieve unemployment pressures in Belgium the anticipated decline in the working age population will reduce incentives to start new such schemes.

3/

It is important to note that the pension schemes for both civil servants and private sector employees are essentially run by the government and that the term “private sector pensions” denotes pensions paid out to retired employees of the private sector, not supplementary pension paid out through a private sector scheme.

4/

The elderly dependency ratio is defined as number of persons over 65 divided by the population between 20 and 64 years. Table 1 also indicates that the ratio of the very elderly, e.g. the fraction of persons over 75 years in the population over 65 also rises dramatically. Depending on the indexation rules governing the pension system, this compositional effect within the group of retired people can have significant financial implications. Although it is outside the scope of this paper, this could have major implications also for the evolution of health care expenditures over the next 50 years.

5/

This paper studies looks at the development of pension expenditures and contributions over the next 50 years but does not incorporate its impact in the framework of a consolidated government budget. See Delbecque and Bogaert (1994) for a study on the impact of aging on the conduct of fiscal policy in Belgium.

6/

For a detailed overview of the Belgian pension system, see Eeckhout, Van Gool and Verdyck (1995) and Geeroms, Rigo and Delgado (1995).

7/

The adjustment before 1975 was de facto very similar to the CPI adjustments subsequently and the CPI is therefore used to adjust salaries before 1975.

8/

Before 1991, the retirement age for men and women was 65 and 60 years respectively. The pension was reduced by 5 percent for each year of retirement before reaching this official retirement age.

9/

The calculations in this paper abstract from this problem since they are based on the number of pensions, not pension payments per pensioner.

10/

The system covers civil servants in the Federal Government, civil servants in the administrations of the Regions and Communities and the local authorities, and certain public enterprises. In the simulations below, we assume that all employees of public enterprises are covered under this scheme.

11/

Since the model is “money neutral”, the inflation rate does not affect the results.

12/

Weemaes (1995) also provides simulations for public sector pension expenditures in the long run.

13/

Although the methodology, assumptions and base year differ substantially, it is interesting to compare these results with the projections developed by the Bureau du Plan, the implications of which are discussed in SM/96/16. Since we consider only retirement pensions and not survivor’s pensions, we obtain a significantly lower level of expenditures throughout. The difference in level is, however, consistent with the recent fraction of survival pensions in total pensions, around 30 percent in 1995. Adjusted for the omission of survivor’s pensions in this study, the evolution over the next half century is broadly similar: A steady rise in expenditures from 1995 until 2010 and a faster rise thereafter towards a new plateau from 2030 onwards. Moreover, the Bureau du Plan study also finds a more rapid growth for public than private pension expenditures. See Englert, Fasquelle and Weemaes (1994) for the results of the Bureau du Plan study and Geeroms, Rigo and Delgado (1995) and Delville, Verplaetse, Defourny and Janssens (1995) for other simulations on pension expenditures in Belgium.

14/

The concepts of net present value and accumulated debt should be used with caution in this context. In principle, they should be used as a measure of the net pension liabilities that arise from moving from one steady state to another, in this case regarding the demographic evolution. Since it is not clear whether the current situation constitutes a steady state and whether the new steady state will have arrived in 2050, these figures should be used only as indication of the nature of the problem. Furthermore, the numbers generated by these measures are highly sensitive to the maintained interest rate assumption used in the compounding or discounting (see below).

15/

The fact that increased productivity growth affects private sector expenditures more importantly than enhanced job creation is due to the fact that a fairly modest improvement in labor market conditions is assumed, compared to a 0.75 percent increase in annual productivity growth (i.e. 1.5 percent in the baseline scenario versus 2.25 percent in the modified baseline scenario).

16/

Again, this measure does not affect private sector pensions compared to the baseline scenario.

Belgium: Selected Background Issues
Author: International Monetary Fund