In the coming years, Belgian pension expenditure will continue to increase to such an extent that it will be among the highest in the European Union. The National Bank predicts this in a new study. At the same time, she is formulating proposals to get aging costs under control. One of these is capping the highest benefits, more specifically the generous civil servant pensions. An assignment for the next government?
Belgian pension expenditure increased by 2.2 percentage points of GDP in the period 2001-2019. The increase in Belgium was higher than the euro area average, with total pension expenditure close to the average in 2019. At that time, Belgian pension expenditure was higher than in Germany and the Netherlands, but lower than French and Italian.
That will soon change. By 2070, Belgian pension expenditure would also be higher than in countries with high debt levels such as Italy, Spain and France. The predicted increase in pension expenditure amounts to 2.1 percent of GDP, the strongest among the reference countries (our neighboring countries plus the Southern European member states). As a result, our country will have the highest pension expenditure by 2070 (almost 16% of GDP or 90 billion in today’s euros). That is more than 3 percentage points of GDP above the average in the euro area, according to the new pension study from the National Bank of Belgium.
To get the rising aging costs under control, the National Bank is formulating a number of proposals. The number of retirees can be reduced by ensuring that careers become longer. A second option is a higher employment rate, which provides more social contributions and tax revenues to finance pensions. A third solution is to increase productivity (defined as GDP per employee), which will provide additional growth and make pensions more affordable.
Reduce average pension
These proposals come from pension experts and economists. The National Bank adds a fourth: lowering the average pension, more specifically by capping the highest pensions. The question arises whether this is politically feasible. Belgians saying from one day to the next that they will receive lower benefits is electoral dynamite. Lowering the highest pensions would also mean that we move further towards a general basic pension with fewer and fewer differences between benefits. This trend has been cautiously initiated for some time now, by increasing the lowest self-employed pensions towards the minimum pension for employees, and by capping pensions for private employees while contributions are not. If the total salary per year is higher than a ceiling amount, the amount above will not be included in the pension calculation. For 2022, the wage ceiling was EUR 71,519.98 for a full year.
But the National Bank focuses mainly on the relatively high civil servant pensions. The difference with employee and self-employed pensions is striking. The gross benefit of the 20 percent of retired civil servants with the highest pension is between 3,500 and 4,000 euros gross per month. That is a lot more than the highest 20 percent of employee pensions: on average between 2,000 and 2,300 euros gross.
For the National Bank, it is clear that lower civil servant pensions can partly counteract the rising aging costs: “The reduction in the average government pension puts permanent and significant pressure on government expenditure on pensions compared to the prospects in the base scenario. The average Belgian government pension would decrease by 2 percent by 2030 and by 14 percent by 2070, compared to the base scenario. That is a significant reduction. (…) In any case, it is worth considering some reduction in the average Belgian government pension, as this would result in significant and lasting savings on pension expenditure.”
The risk of breach of contract
Work for the next government, because the Vivaldi coalition left civil servants’ pensions untouched. The question is whether you can simply reduce those benefits. This question is also asked in the study: “Whether this scenario strikes the right balance between ensuring financial sustainability and the adequacy of the pension system is open to discussion.”
Suddenly reducing benefits can be seen as a breach of contract between citizens and government. Although this is already happening in other ways in the pension system, albeit in a devious way. Just think of the supplementary pensions that were initially made fiscally attractive and then taxed early on the accrued pension reserves.
A more realistic option is to adjust the pension rules for those who are not yet retired civil servants or who are starting a career in the public service. Previous governments have already taken measures there, such as mainly hiring contractual civil servants who accrue less generous pension rights. In addition, the civil servant pension is no longer calculated on the basis of the salary of the last five years, but on the last ten years. The so-called pension breaks were revised. These made it possible to receive a full pension even if one had not completed a full career. An idea that was on the table during this legislature but not discussed is the abolition of equalization of civil servants’ pensions. This means that government pensions will increase along with the wages of active civil servants. This will be discussed again during the formation discussions in 2024. But it will not be enough to control rising aging costs.