Paying for pensions: is this country bankrupt?

Apart from stabilising its public debt, the real challenge facing this country is the funding of pensions and healthcare. Long overlooked, this problem is obscured by the lack of proper accounting by the State. Unlike a private enterprise, the State records only the flows of income and expenditure, without trying to estimate the amount of debt accruing from past commitments.

Over the past few decades, many working groups warned the public authorities that imbalances were looming. Unfortunately, the country always found other interesting issues to distract it from any serious analysis. Recently, for instance, despite announcements that a group of experts was about to issue its report on pensions, the only concrete outcome was that publication was postponed! That is all the more distressing because it destroys the credibility of the experts who took part in this abortive exercise. So other voices must be raised.

We can no longer avoid owning up financially to the culpable negligence that we have systematically shown. The cost of pensions is soaring, due to a combination of two circumstances: the baby-boomers and women are reaching pensionable age and life expectancy is rising. In the space of just 50 years, the average length of pension pay-out has increased from 8 to 20 years. This reality, together with early retirements, is jeopardising growth for future generations, who will be unable to foot the bill for several generations at once. The crisis of 2008 pushed us, sooner than we had expected, into facing these realities.

To fully gauge the challenges, we have to examine the figures without fear or favour. The cost of ageing (basically, pensions and healthcare) represents 26% of GDP. That figure will rise to 31% of GDP in 2060 – in other words, one-third of the value added by the private sector economy. This increase is mainly due to pensions, the cost of which will go up from 11% to 15% of GDP between 2014 and 2060, with a particularly steep climb over the next fifteen years. In constant 2014 euro terms, the overall cost of pensions (up to 2060) will be getting on for 1500 billion, which is more than three times the size of GDP and almost 45 times higher than the total tax take from private individuals. So we would have to pay 45 years’ worth of taxes in order to fund 45 years’ worth of pensions. That is quite mind-boggling.

A dwindling active population will not be able to afford the growing cost of those who are inactive. For instance, people of working age (25-65) will make up less than half of the Belgian population in 2050. And yet, it will not be feasible to finance the expected ageing of the population simply by increasing the active workers’ contributions, any more than we could pass on the whole cost of this ageing to the retirees themselves by slashing pensions.

Moreover, this is a question of intragenerational as well as intergenerational equity. To put it another way, equity must be ensured not only between different generations but also within them. What is also at stake here is the pauperisation of certain classes of older people, and revenue disparities between pensioners. Thus, educational levels, vocational adaptability, family circumstances, the number of children and life expectancy also give rise to inequalities.

So a solution for pension funding cannot be found without modifying the parameters of taxation and social security. Consideration must be given to a whole set of measures that would need to be applied jointly. In other words, an intergenerational balance has to be struck, such as the one proposed by American economist Robert Musgrave, under which the incomes of active workers and pensioners must remain stable, as if the present situation were societally “just”. To achieve this Musgrave balance, an increase in active workers’ contributions will have to be introduced simultaneously with a reduction in inactive workers’ pensions. This is like constantly bringing a gigantic pair of scales back into balance over time, through concomitant adjustments to contributions and pensions.

Concretely, this objective must lead to higher employability of young people, a longer working life and an increase in the activity rate of older workers – particularly in Belgium. In point of fact, it appears that if everyone worked up to the age of 65, pension funding would be in balance. In practice, four measures may be considered simultaneously: a progressive increase in social security contributions (of the order of 3%, to be implemented mainly from 2030 onwards), a control on pensions (which could take the form of delinking the highest pensions from the cost-of-living index), alternative financing of pensions through certain types of taxation, such as VAT, and an increase in older people’s activity rate. This last lever is the most effective one, but also the most risky. In fact, the economic and technological upheavals, coupled with deskilling, have partially blocked that route.

Alongside these courses of action, other options are thinkable, such as a convergence of pensions towards a universal benefit. Another approach would be to fiscalise contributions – in other words, subject them to the same progressivity as earned income, rather than calculating them as a proportion of income. This is the principle of a Generalised Social Contribution. It would entail fiscalising social security, which is currently based on insurance principles. But in fact, the line between taxation and social security has already been blurred – social benefits account for almost 50% of State spending, whereas social contributions make up only 30% of public revenue. The gap is filled by various taxes. We must also take into consideration the parallel development of a capitalisation pension system (of the pension savings type), which would come into play over the next few decades, with greater advantages for young workers.

Solving the pension problem is all about honouring a societal obligation and a commitment to solidarity. But to solve it by quietly postponing a solution is a serious political mistake. There is no one single route to a permanent solution for funding pensions. For that reason, it is important to revise the blueprint within the framework of a renewed social and fiscal contract. That is the price that must be paid if the country is not to collapse under the weight of its own commitments. Because, unless strategic intelligence and vision are brought to bear, the country could go bankrupt.