Matthieu Remy
09 Nov 2020
Your legal pension is threatened: here is why
The legal pension is an essential source of income, which ensures that a retiree receives 60% of his working remuneration. However, this ratio could drop to 40% as demographics put pressure on our pension system. Under these conditions, constituting a supplementary personal pension is a necessity.
What is the "legal pension"?
The statutory pension is the monthly pension paid by the State to a retiree until his death. It also bears the name of statutory pension or social security pension. This is the first pillar of the Belgian pension system.
Workers pay retirees
The legal pension is funded by a "pay-as-you-go" system: part of the income tax paid today by workers is directly used by the State to pay the full statutory pensions of retirees. It is a social mechanism for transferring wealth.
2 workers finance 1 retiree
In 2020, the state pension budget amounted to €44 billion which was collected from 4,5 million active workers for the benefit of 2,4 million pensioners. A retiree receives an average of €1.500 / month, while a worker pays some €800/month in tax for the system.
An unstable intergenerational contract
The pay-as-you-go system only works if a balance is respected between workers who contribute and retirees who receive. However, this is no longer the case: there are a series of structural causes doomed to persist over time which increase the pressure on the pension system.
Socio-demographic causes
This pressure is exerted by the "distortion" of the age pyramid, the increase in life expectancy, and the increasingly late arrival of young people in the labor market. All this in a context where the pivotal retirement age, 65, has changed less quickly than these transformations.
The Baby Boomer cohort
In the aftermath of the Second World War, Belgium saw the number of births explode to 150.000 per year against 115.000 today. The massive arrival at retirement age of this Baby Boomer generation (1950-60) causes an imbalance that is the main cause of the pressure on the system.
The increase in life expectancy
In 1960, life expectancy in Belgium was 70 years old, in 2020 it is 83. In other words, every 5 years we have gained one year of life expectancy. However, the legal pension age at 65 has not changed since that time; that is as many more years to finance.
By the way, why the pension at 65?
It is said that Chancellor Bismarck, father of the pay-as-you-go pension, had consulted his statisticians to set an age from which the number of survivors would not have been too high to limit the cost of the financing necessary for the establishment of a pension scheme. At the time, life expectancy was 40 years old. Cynical...
Late entry into the labor market
The increase in the number of pensioners is not offset by an equivalent increase in the number of workers. On the contrary, the fall in birth rates and the lengthening of studies reduce the number of workers. In 2000, 50% of 20-year-olds were working vs. 40% in 2020.
-30% legal pension if nothing is done
If nothing changes to the current system, the catastrophe is inevitable: the proportion of retirees will increase so much that the legal pension will decrease within 40 years from €1.500 to € 1.000/month. In 2060, half of retirees, or 2 million people, will potentially live below the poverty line (€1.085).
A universal problem
This problem is not unique to Belgium. All developed countries that have adopted a pay-as-you-go pension system - the majority of OECD countries - face the same challenges.
Possible solutions
This situation is not inevitable, the pension system as a whole could be saved by an increase in the legal pension age, work on the demographic curve, issuance of government debts, or a transformation towards an individual savings system.
Increase taxes or reduce expenses
An increase in the taxation of workers could maintain the legal pension, but the taxation on labor is already very high. A reduction and reallocation of the legal pension of certain wealthier classes in favor of more modest legal pensions seems more likely.
Increase pension age to 67
By 2025, the statutory pension in Belgium will increase to 66, then to 67 in 2030. This increase is mathematically (not necessarily politically) the most obvious solution. The effect of this measure will increase the statutory pension by 10%, or €100.
Employ the inactive
Today, nearly 2,5 million Belgians old enough to work and contribute to the pension system are inactive, including 500.000 unemployed. Putting part of this 20% of the population to work, even partially, would greatly support the system through their social contributions.
Promote birth rate
Certain policies, notably through family allowances, aim to increase the birth rate. However, it takes 25 years for a newborn to enter the labor market, which will not solve the problem of the legal pension in the short-term.
Beneficial effect of immigration
Belgium has a net immigration of 46.000 people per year, most of them workers contributing immediately to the pension system. Some observers say Germany’s decision to take in 1 million migrants between 2015 and 2020 was motivated by the opportunity to support its pension system.
Issue debt
A government always has the option of borrowing money in the financial markets, from private or institutional investors, by issuing government bonds. This debt could be used to finance pensions, but that would be deferring the problem to the next generation.
Promote individual savings
Finally, States could continue as they do to promote individual savings for pensions. That is, the workers themselves contribute towards their pension by capitalizing their savings, rather than relying on the distribution of the legal pension.
Our prediction
Our conviction is that governments will apply the full arsenal of mentioned measures. The goal will be to redistribute wealth from those who have it to those who do not. In this process, the upper middle class will undoubtedly be the one that suffers the most from the negative effects of redistribution and a drastic reduction in their legal pension. We will probably see a privatization of the pension system in which savings and personal capital will be invested in pension plans complementary to the legal pension.
Take the lead
The only solution to avoid running straight into the wall on a personal basis is to take matters into your own hands and set up a supplementary pension plan including a personal pension plan made of tax-advantaged investment vehicles and a regular investment account.
easyvest helps you in planning your pension and it starts here with a simulation.
Note: This article was written when Easyvest was authorized and regulated by the FSMA as an agent in banking and investment services.