PENSION PROTECTION IN BELGIUM.

OVERVIEW AND CHALLENGES Text prepared for the workshop on the occasion of the honorary degree of John Myles by the KU Leuven1 Jos Berghman & Hans Peeters (all comments are welcome: e-mail jos.berghman@soc.kuleuven.be or hans.peeters@soc.kuleuven.be) INTRODUCTION An increasing number of people are reaching the retirement age and the length of their retirement is spanning an increasingly long period of time. While in 1950, a 65 year old man was expected to live, on average, for another 12 years, in 2009 this had lengthened to 17 years. During this same period, life expectancy among women after retirement age increased from 14 to 21 years (Veys, 1983; Human Mortality Database, 2012). It is not surprising therefore that the pension debate has, for some time now, dominated scientific and political discourse with the focus primarily on the affordability of pensions. The Belgian Study Committee on Ageing, for one, annually publishes updated statistics that clearly show the increasing additional cost of pension protection (e.g. Studiecommissie voor de Vergrijzing, 2011). Recent pension reform measures, such as raising the early retirement age, have also largely focused on pension affordability. While this focus is warranted, it has to be complemented with an analysis of the distribution of current pension protection among diverse categories of the population. In this analysis, the dual goals of pension protection must be central: Procuring a minimum income for the elderly, and ensuring that the elderly can maintain an acceptable standard of living. The question at hand is, therefore, not simply whether pensions are and will remain affordable, but whether they also meet these dual aims. In this contribution, pension protection in Belgium is analyzed in two ways. In the first section, we present an overview of the regulations that shape pension build-up in Belgium.2 This overview shows that pension build-up is contingent upon the characteristics of peoples careers and their civil status. To see how these regulations work in practice, the second section complements this overview with empirical findings regarding the distribution of actual pension protection of current pensioners. The combination of factors presented in both sections allows us to focus, in a third and final section, on a series of challenges that current pension protection faces.

The authors would like to thank Anke Mutsaerts for the analyses and Hans Knapen for his contribution to the conversion of gross to net pension benefits. Furthermore, we would like to thank Elke Brungs, Annelies Debels, Rika Verpoorten, Giselda Curvers and Hendrik Larmuseau for their valuable comments. Finally, we are also grateful to Chris Brijs for his help on the manipulation of the basic datasets. 2 The overview concerns the situation as it was before parts of the new coalition agreement were put into place. Changes (to be) made as a result of this coalition agreement are discussed in footnotes. 1

1. PENSION REGULATIONS In order to structure our overview on pension regulations in Belgium, we make use of the three pillars concept. This concept was developed in the early 1980s as a means of better understanding the merging of private and public elements in social security (Gieselink, Peeters, Van Gestel, Berghman & Van Buggenhout, 2003). No consensus has so far emerged on a universal definition of the three pension pillars; different authors use distinct definitions (for example, Adema and Ladaique, 2005; Pedersen, 2004). In this text, the distinction between the different pillars is made on the basis of a double criterion. The organization responsible for the financial management distinguishes first-pillar pension from second- and third-pillar pensions. While in the first pillar management is in the hands of public institutions (central government, local governments or social security institutions; cf. OECD, 1999), in the second and third pillars this is the responsibility of private institutions. The second criterion concerns the labor market-related nature of pension build-up and thus distinguishes first- and second-pillar pensions from third-pillar pensions. In sharp contrast to the first two pillars, anyone can take part in the third pillar, regardless of his or her specific employment situation. On occasion, a zero pillar is also distinguished, which consists of social assistance benefits that ensure a minimum income for the elderly. Entitlement to the latter benefits is independent of previous labor market participation but is means-tested and therefore only granted if total income remains lower than the legally defined threshold.3

1.1. First pension pillar Within the first pillar two types of pensions are distinguished: the retirement pension and the survivors pension; and three different pension schemes exist: the employee pension scheme (which also includes civil servants with a normal labor contract [contractuele ambtenaren]), the selfemployed pension scheme, and the (statutory) civil servant pension scheme.

1.1.1. The retirement pension A retirement pension is paid to elderly that have been formally employed. Currently, to be able to benefit from a retirement pension, one has to be 65. However, an option exists for early retirement from the age of 60 and on. In order to be eligible for an early retirement pension, employees as well as the self-employed have to have had a career of at least 35 years. Notably, for the self-employed (unlike for employees), early retirement leads to diminished pension rights. Early retirement as a civil servant is also possible, provided that ones career as a civil servant has lasted at least five years.4 The way in which pensions are calculated strongly differs according to the pension scheme.
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For didactical purposes, certain complexities in pension legislation are not discussed. For a detailed examination of existing legislation, see Stevens (2011a; 2011b) (for the first and second pension pillar for employees and the self-employed), PDOS (2011a; 2011b) (for civil servants), Gieselink et al. (2003, pp. 48-54) or Van Eesbeeck & Vereycken, 2010, pp. 261-287) (for the third pension pillar) and Stevens (2011c) (for social assistance benefits for the elderly). 4 The new coalition agreement (Ontwerpverklaring over het algemeen beleid, 2011, pp. 102-103) changes the conditions for early retirement. As a general rule, in all pension schemes, early retirement is only possible from the age of 62 onwards and after having worked for 40 career years. 2

Retirement pensions for employees are calculated on the basis of three components: the length of the career; the gross wage received for each year of that career; and the family situation of the pensioner. A full pension is reached after 45 formally employed years. For each of these employed years, the gross wage earned is (largely) inflation proofed5 and capped (above a certain wage level contributions are calculated on the total wage but pension benefits are only based on the capped wage).6 In contrast to most other OECD countries (OECD, 2011, p. 110), in Belgium wages are not revalued (adapted to the changes in the general welfare level).7 Pensioners married to someone without any (or with a limited) income, are entitled to a family pension, which is calculated at the family rate (75% of previous wage). Other pensioners are entitled to pensions at the single rate (60% of previous wage). Hence the formula used to calculate pensions per employee career year is as follows: (gross salary of the year/45) x (60% or 75%). The calculation is made separately for each career year and then all partial amounts are summed. The calculation of the retirement pension for the self-employed is comparable to that of employees, excepting that professional income rather than wage is used; career years before 1984 are based on a fixed amount; and from 1984 onwards, adaptation coefficients are used that initially compensated for the differential contribution level between employees and the self-employed. The self-employed pay a lower contribution rate and therefore build up fewer pension rights than employees. Thus, the formula used from 1984 onwards to calculate pensions is as follows: (professional income/45) x (60% or 75%) x adaptation coefficient. Similarly, the calculations are made for each year of the career and then all separate amounts are summed. The retirement pension for statutory civil servants is based on the average wage of the last five years of the career and is also linked to the number of career years.8 On the basis of each career year, one is entitled to one sixtieth of the average salary (cf. disregarding existing more preferential pension formulas). Therefore, a complete career of 45 years amounts to a pension of 75 percent of the average wage of the final five career years. In contrast to the employee and self-employed schemes, the family situation of the statutory civil servant pensioner is not taken into account. This leads to the following pension formula: (average wage of last 5 years/60) x number of career years. As the civil servant pension is calculated based on the last five career years (and thus not on the average career wage), the reduction of income after retirement is minimal when compared to that of employees and of the self-employed. In all three pension schemes, a guaranteed minimum pension [Gewaarborgd minimumpensioen] exists. In January 2008 this minimum pension was 919/1.149 (single/family rate) for employees; 814/1.082 (single/family rate) for the self-employed and 1.077/1.346 (single/family rate) in the civil servant scheme, provided that the pensioner had worked a full career

Previous wages are not completely inflation proofed because several index adjustments have not taken place in the 1980s and because as of 1994, the health index [gezondheidsindex] is used as an index mechanism. This index does not take into account all possible costs that affect general welfare such as the rising costs of fuel. 6 The cap on wages amounted to 47.960 in 2010. For the sake of comparison, a research assistant at the KU Leuven with 12 years of service has a gross wage of 48.807. 7 In the employees scheme a sort of revaluation existed for the wages earned between 1955 and 1974, but since 2005 this no longer applies. 8 The coalition agreement (Ontwerpverklaring over het algemeen beleid, 2011, p. 103) stipulates that civil servants pensions will be calculated on the basis of the final ten, rather than on the final five career years. 3

of 45 years.9 Note that these figures should be regarded critically as full careers are rather exceptional (see below Graph 8). For careers spanning less than 45 years, only a proportion of the minimum pension is granted. In order to understand the basics of Belgian retirement pension regulations, four further elements should be clear. First, in the employee and the self-employed pension scheme (but not in the civil servant scheme), a retirement pension exists for divorced spouses. This divorce pension is based on the career of the previous marriage partner. For each year that an individual was married but did not accrue own pension rights, a pension is provided calculated at 62,5 percent of his/her previous spouses pension build-up at the single rate. A second important element has to do with the assimilated periods [gelijkgestelde periodes in the employee and self-employed scheme; aanneembare diensten in the civil servant scheme]. In the three schemes, certain periods of inactivity or absence from work can be assimilated into periods of employment without requiring any pension contributions - examples of which include disability and unemployment. The pension rights built up in such assimilated periods are identical to those that were built up in the previously worked year. Thirdly, in the self-employed and employee scheme, after retiring, pensions are no longer automatically adjusted to changes in welfare of the active population. Such revaluation occurs only at irregular intervals. This contrasts to the situation of civil servants where an increase in the wages of active civil servants automatically leads to an increase in the pensions of civil servants [known as perequatie]. Finally, employees, the self-employed and civil servants are limited in how much they can augment their pensions with additional work income. According to the regulations on approved labor [toegelaten arbeid], too high an income leads to a (partial) reduction of pension income. On the basis of the previous discussion of the pension formula in the employee scheme, one can understand the theoretical replacement rates that are calculated by the OECD for Belgian employees with a full 45 year career (which is of course the exception, see below Graph 8). The figures below reflect the pension of someone starting his/her career in 2008 under current legislation and retiring in 2053. As Table 1 illustrates, the replacement rate (ratio of retirement pension to final earnings) of an average worker is not 60 percent - as one might conclude after a quick examination of the pension formula but only 42 percent. This is attributed to the fact that wages are not revalued and that the OECD assumes a real yearly gross wage increase of 2 percent. The gross replacement rate for someone with half the average wage is higher (60,1%) due to the various minimum pension
In September 2011 these minimum amounts were 1.066/1.332 (single rate/family rate) in the employee scheme, 1.007/1.310 (single rate/family rate) in the self-employed scheme and 1.237/1.546 (single rate/family rate) in the civil servant scheme. In the employee scheme another minimum regulation also exists, the Minimum Annual Credit [Minimumrecht per loopbaanjaar]. This regulation originally stipulated that the wages on which pensions are calculated correspond at least with the minimum wage of a 21 year old. However, since 2006, the minimum wage that is taken into account has been markedly raised so that after a full career a pension calculated for every year on the basis of the Minimum Annual Credit equals a full minimum pension. Moreover, since 2006, in response to some existing problems with the Guaranteed Minimum Pension (see Palmans, Peeters & Berghman, 2007 for an overview) a new (less advantageous) Guaranteed Minimum Pension arrangement was added to the existing one. Unfortunately, at this moment no study exists that focuses on the specific effects of these three pension regulations for employee pension protection. 4
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regulations. Likewise, due to the wage ceiling, the gross replacement rate of someone earning 1,5 times the average wage is only 32,7 percent.

Table 1. Gross replacement rates according to OECD-methodology 0,5 times average wage average wage 60,1% 42,0% Source: OECD, 2011, p. 119 1.1.2. The survivors pension

1,5 times average wage 32,7%

A survivors pension can be paid out to the widow(er) of an employee, self-employed or civil servant upon the latters death. In order to be entitled to such a pension, the recipient must have been married to his/her spouse for a minimum of one year at the time of the spouses death. Individuals cohabitating [feitelijk of wettelijk samenwonenden] are not entitled to a survivors pension. The survivors pension in the employee and self-employed scheme consists of 80 percent of the deceased spouses retirement pension, calculated at the family rate of 75 percent of previous wages. In those cases where the surviving spouse receives a retirement pension him/her-self, both pensions can be combined to equal 110 percent of the survivors pension. In the civil servant scheme a distinct regulation exists, generally yielding pensions lower than 80 percent of the deceased spouses retirement pension. Age requirements are entirely different in the survivors scheme than in the retirement scheme. As a general rule, the widow(er) has to be a minimum of 45 years old. However, no age conditions apply if the widow(er) is (partly) invalid or has at least one dependent child. In 2002 this was the case for 50 percent of widows in the 20-29 age group, 71 percent in the 30-34 age group, 80 percent in the age 35-39 group and 83 percent in the 40-44 age group (Taelemans, Peeters, Curvers & Berghman, 2007, p. 140).10 As in the employee and self-employed retirement scheme, survivors pensions can be granted to divorced marriage partners (and, in this case, also to ex-spouses of civil servants). Also, like in the retirement scheme, the regulations concerning approved labor apply.

1.1.3 Social security contributions and taxes On first pillar pensions, both social security contributions and taxes are due. Social security contributions contain both a Sickness and Invalidity [Ziekte en Invaliditeit; ZIV] and a solidarity contribution. The Sickness and Invalidity contribution ranges between 0% and 3,55%; the solidarity contribution between 0% and 2%. Tax rates are progressive. The effect of social security contributions and taxes on pensions and wages is illustrated in Graph 1. In this graph, first, the average social security contribution and tax rate is set against the gross pension income (cf. the dotted line). The graph shows that below the threshold of 1.000 gross pension, no taxes or contributions are paid. From that amount on, the average contribution and tax rate increases progressively. The steep increases between 1.200 and 1.250 and between 2.000

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The new coalition agreement foresees changes in entitlement conditions. See note 25. 5

and 2.200 are caused by exceeding the Sickness and Invalidity and the solidarity contribution thresholds. As the graph illustrates, contributions on gross wages differ from those on gross pensions (cf. full line), although the general principles are similar.11 For gross wages, employee contributions are first withheld from a certain minimum threshold on, and then, again taking into account a minimum threshold, the remaining wage is taxed progressively.

Graph 1. Average social security and fiscal contribution rates on pensions and wages, situation 2008
60

50

40

30

20

10

0 0 500 1000 1500 2000 2500 3001 3500 4001 4500 5000 Average SS and fiscal contribution rate on pension Average SS and fiscal contribution rate on wage

The comparison of the average contribution and tax rate on pensions and wages, shows that wages are taxed more heavily than pensions, and that this difference is greater when gross wage is lower. Note, that since the above mentioned pension formulas (see 1.1.1.) represent gross values, they therefore give an inaccurate image of the way pension income replaces previous wages. In reality, the level of pension benefits is more beneficial than the pension formula implies.12 The previous discussion of the contributions rate on pensions and wages makes it possible to understand the OECD net replacement rates. For an average worker this replacement rate is 64 percent; 82 percent for a worker with half the average wage; and, 52 percent for someone earning

In the graph, only employees social security contributions and taxes on wages are modeled, and not those of the self-employed or civil servants. 12 The graph refers to a single pensioner without dependants [personen ten laste], with only a pension income at his disposal. For the modeling of taxes, we use the advance tax payment [bedrijfsvoorheffing] scales that apply. These scales assume a communal surtax of 7%. Similarly, for the modeling of wages, we assume that there are no dependants and use advance tax payment scales. 6

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1,5 times the average wage. These replacement rates are some 20 percent higher than gross replacement rates. Such a marked difference between gross and net replacement rates is exceptional in an OECD context (see OECD, 2011, part 2, chapter 2).

Table 2. Net replacement rates according to OECD-methodology 0,5 times average wage average wage 81,8% 64,1% Source: OECD, 2011, p. 125 1.2. Second pension pillar

1,5 times average wage 52,0%

Second pillar pensions exist for both employees and for the self-employed. Given the high first pillar pensions for statutory civil servants, second pillar pensions for this group are exceptional. The second pillar for employees can be provided by the employer (company pensions) or the sector (sector pensions). A second pillar for the self-employed can either be in the form of the Free Supplementary Pension for the Self-Employed [Vrij Aanvullend Pensioen voor Zelfstandigen; VAPZ] or in the form of one of the various pensions for self-employed managers. Contrary to first pillar pensions, access to the second pillar is not automatic. Among employees it is either the employer or the sector that decides (within the bounds of the law) to set up a pension plan. Moreover, the pension formula that determines the level of the pensions built up is also chosen by the employer or the sector again within the legal framework. Conversely, among the selfemployed, the decision to take part in a second pillar pension scheme is entirely their own. While first pillar pensions are always paid as an annuity [rente], second pillar pensions can be paid out both as an annuity or as a lump sum [kapitaal]. In those cases where the second pillar pension is paid as an annuity, the pensioner receives a regular (e.g. monthly) supplement to the first pillar pension. Where the second pillar pension is paid as a lump sum, the full amount is received in a onetime payment. Social security contributions and taxes on second pillar annuities are similar to those on first pillar pensions. Social security contributions on second pillar lump sums are also identical to those on first pillar pensions, be it that lump sums are first converted into fictitious annuities by making use of the official conversion coefficients.13 However, taxation on lump sums is completely different. Unlike first pillar pensions, second pillar pensions are taxed at a fixed rate of either 10% or 16,5%. The distinction between both rates relates to the individuals age at the time of take-up and the way in which benefits have been built up (by employer or employee contributions). The differences between the contribution rates for annuities and for lump sums is illustrated in Graph 2. The graph shows that for the average employee with a second pillar pension (i.e. someone with a gross first pillar of 1.465) it is always more beneficial to have a second pillar pension as a lump sum.14 Note that in order to be able to compare annuities and lump sums, we have converted
See Berghman, Curvers, Palmans & Peeters (2008, chapter 3) for more information on these conversion coefficients. 14 For the modeling of taxes, we use the advance tax payment [bedrijfsvoorheffing] scales that apply. These scales assume communal surcharges [gemeentelijke opcentiemen] of 7%, leading to fixed income tax rates of 10,09% or 16,66%. In graph 2, we have used the average of both (13,375%). As only the part of the second 7
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the lump sum into fictitious annuities making use of estimates on life expectancy at age 65 and an interest rate of 3,5% (see 2.2 for more detail on these estimates). Graph 2. Average social security and fiscal contribution rates on second pillar pensions paid out as lump sum or annuity, situation 2008 (lump sums converted into fictitious annuities)
50 45 40 35 30 25 20 15 10 5 0 25 525 1025 1525 2025 2525 3025 3525 4025 4525 5025 5525 6025 Average SS and fiscal contribution rate annuity Average SS and fiscal contribution rate lump sum

1.3. The third pension pillar In the third pension pillar, each individual is free to participate, irrespective of his or her professional status. In Belgium, third pillar pensions can be built up by taking part in pension savings programs [Pensioensparen] or by having individual life insurance. Pension savings refers to the practice of saving money under fiscally advantageous conditions with the stipulation that the money saved is only available at the retirement age. In 2011, the maximum yearly amount that could be contributed under fiscally advantageous conditions under the pension savings program was 880. The logic behind the individual life insurance option is largely similar to that of the pensionsavings system. However, with individual life insurance the amount that can be contributed under

pillar pension that has not been built up by profit sharing is taxed, a further assumption is needed on the percentage of the annuity or lump sum that is built up by profit sharing. The fiscal administration assumes 20% to be built up by profit sharing. However, according to experts (Werkgroep 80%-regel samengesteld uit leden van de Commissie en de Raad voor Aanvullende Pensioenen, 2004, pp. 19-21) this 20% is an overestimation: Depending on the duration of the contract the proportion of profit sharing would vary between 0% and 15%. Unfortunately, these experts do not provide data that allow any evaluation of these percentages. Therefore, the assumption used here remains entirely arbitrary. We assume 5% of all second pillar pensions to be built up by profit sharing. 8

fiscally advantageous conditions was 2.120. Also, unlike in the pension savings program, an incomerelated threshold exists (see Van Eesbeeck & Vereycken, 2010, p. 266 for more details).15 Third pillar pensions paid out as lump sums are taxed at a fixed rate of 10% or 16,5%, depending on whether contributions were made before or after 1993.

1.4. Social assistance for the elderly Individuals that have built up insufficient or no pension rights can apply for social assistance support known as the Income Guarantee for the Elderly [Inkomensgarantie voor Ouderen]. The Income Guarantee is means tested and therefore only provided after considering a candidates means of subsistence (such as pensions, income from rent, inheritance, etc.). When calculating social assistance benefits, both the applicants subsistence means and those of the people with whom he/she shares a main residence are taken into account. In September 2011, the Income Guarantee was maximum 953,30 per month for a person living alone; for those people who share their main residence with one or more people, this is divided by 1,5, equaling a maximum amount of 635,53 per month.

The fiscal benefits granted are the same as those for employee contributions for second pillar pensions. See note 33 for the changes made as a consequence of the new coalition agreement. 9

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2. EMPIRICAL RESULTS The above focus on the existing regulations provides preliminary insights into the Belgian pension system. In this section, we will complete this picture with some empirical findings on pension protection among Belgian pensioners. This is necessary as the level of the first pillar pension is closely related to labor market participation and civil status, while participation in the second pillar is determined by the employer or the sector, requiring additional empirical insights into the prevalence of second pillar pension plans. The same applies to third pillar pensions. Unless otherwise indicated, the analyses included in the graphs and tables, are based on data from the 2008 Pension Register [Pensioenkadaster], and complemented, when necessary, with sociodemographic information from the National Register [Rijksregister]. For more information on both datasources see Berghman et al. (2010). To better situate the empirical information provided below, it is useful to consider the following reference amounts: the level of social assistance benefits for a 65 year old living alone was 861; the corresponding and much used poverty threshold, equaling 60 percent of equivalent median net income, was 899 and the average net wage of a single worker without children was 1.950 in 2008, according to EUROSTAT (2011).

2.1. The first pension pillar In 2008, the average net first pillar pension for Belgian pensioners was 1.094 (1.269 for men and 944 for women).16 However, as Graph 3 shows, this average value belies a considerable amount of variance. This graph presents pension income in deciles for both men and women. These deciles result from ranking pensioners according to their pension income. To acquire the lowest decile (D1), the average pension is then calculated for those men and women with the 10 percent lowest income. The same procedure is applied to the other deciles. The graph shows that for men the average pension of the highest decile (2.102) is more than four times higher than that of the lowest decile (485). This variance is even more marked among women. In order to better understand the variance noted in Graph 3, in the following graphs the average pension amounts are stratified according to certain background variables. In these graphs, we continue to make a distinction between men and women.

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For the conversion of gross into net pension benefits we use the assumptions previously discussed. 10

Graph 3. Average monthly net first pillar pension in deciles and by gender, 2008
2200 2000 1800 1600 1400 1200 1000 800 600 400 200 0 D1 D2 Total D3 D4 D5 Men D6 D7 D8 Women D9 D10

Graph 4 presents average pension income by age. With the exception of pensioned women over the age of 80, the graph reveals a negative correlation between pension income and age: the older the pensioner, the lower the pension. Extensive research into the causes of this negative correlation currently does not exist. However, this trend can most likely be ascribed to the fact that pensions are not automatically adjusted to general welfare (see 1.1). The higher pensions among the 60-64 age group can be explained considering that this group almost exclusively consists of civil servants and pensioners that have opted for early retirement. As was mentioned above, early retirement requires having had a career of minimally 35 years. Because there are no pensioners with careers of less than 35 years in this group, this generates a higher average. The higher pensions for women in the oldest age groups can be ascribed to the fact that these are almost exclusively survivors pensions and, as will be shown below, these are on average higher than womens retirement pensions.17

Few individuals take up their pensions before the age of 60. Therefore, the pensions of these individuals are not reflected in Graph 4. For results concerning this group, see Berghman et al. (2010, p. 63). 11

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Graph 4. Average monthly net first pillar pension by age and gender, 2008
1600 1400 1200 1000 800 600 400 200 0 60-64 Total 65-69 70-74 Men 75-79 80-84 Women 85+

Graph 5 distinguishes different types of pensions (retirement pension, survivors pension, the combination of retirement and survivors pensions). Among women, the highest pensions are found among the group of women that combine a retirement and a survivors pension. This is a direct consequence of the related legislation that allows the combination of retirement and survivors pensions for up to 110 percent of the original survivors pension. That survivors pensions are, on average, higher than retirement pensions among women should not be a surprise considering that survivors pensions are based on the generally longer and more lucrative careers of their husbands. For men, the distinction by type of pension is less important since only 1 percent of the pensioners that receive a survivors pension are men, and only 4 percent of pensioners combining a retirement and survivors pensions are men.

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Graph 5. Average monthly net first pillar pension by type of pension (retirement pension, survivors pension, retirement and survivors pension) and gender, 2008
1600 1400 1200 1000 800 600 400 200 0 RP Total SP Men RP + SP Women

Graph 6 shows the importance of the pension scheme in determining which rights have been built up. The graph distinguishes four categories of pensioners: former employees, self-employed, civil servants and a mixed category. The employee category is the most sizeable: 47 percent of all pensioners exclusively receive a pension that is built up in the employee system; 7 percent receives a pension built up in the self-employed system; 14 percent receives a pension from the civil servant system, and 32 percent combines pensions from different systems. As shown in the graph, the pension varies strongly depending on the pension scheme from which it derives. The average net civil servant pension is 1.599; the average employee pension is 994, and the average self-employed pension is 663. The average pension for those combining pension rights across pension schemes is 1.121. In all categories men have higher pensions than women.

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Graph 6. Average monthly net first pillar pension by pension scheme (employees, self-employed, civil servants and mixed) and gender, 2008
2000 1800 1600 1400 1200 1000 800 600 400 200 0 Employee Total Self-employed Men Civil servant Women Mixed

Graph 7 divides the first pillar pension in deciles while taking into account household composition and gender (men living alone, women living alone and couples living together - both married and cohabitating). In order to be able to compare the pensions of couples living together with those of men and women living alone, we make use of the concept of equivalent pension income. To account for economies of scale we use the modified OECD-scale: The total pension income of a two-person household is divided by an equivalence factor of 1.5 and then attributed to both individuals in the household. The graph shows foremost that, when accounting for the general household situation, womens extremely low individual pensions (see Graph 3) are no longer apparent: A large number of women combine their low pensions with the higher pensions belonging to their husbands. The graph shows furthermore that low (equivalent) pensions can still be observed in the lowest quintiles (approximately 500 in the first quintile; approximately 800 in the second quintile). Since some households combine two full pensions, we find the highest equivalent pension income among individuals that live together.18

Because data are only available on pension income and not on wages, the calculation of equivalent income of those living together (married or cohabitating) is limited to households consisting of two adults over the age of 65. Further, note that individuals residing in a collective household (e.g. a nursing home) are not included in the analyses. For a discussion of this groups pension income, see Peeters, Debels & Verpoorten (2011). 14

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Graph 7. Average monthly net equivalent first pillar pension in deciles by household composition and gender, 2008
2200 2000 1800 1600 1400 1200 1000 800 600 400 200 0 D1 D2 D3 Living together D4 D5 D6 Men living alone D7 D8 D9 Women living alone D10

One central conclusion to be drawn from the previous graphs is that womens pension protection is considerably lower than that of men. A detailed analysis of this disparity is currently not available. As shown in Graph 8, however, this disparity can to a large extent be explained by varying levels of labor market participation among men and women in the past. The graph represents a sample of employees that received their first retirement pension between 2002 and 2004. The Y-axis represents the cumulative percentage of men and women, the X-axis the cumulative percentage of career years. Among the longest careers, we see significantly fewer women than men. Only 22 percent of women had a full career (43 career years under the legislation at the time) while among men, 52 percent had a full career of 45 years. Further analyses show that 23 percent of those people living together, and 21 percent of men and women living alone have pension incomes below the poverty threshold of 899. Of course receiving such a low pension is not necessarily an indicator of poverty risk as pensioners can also have other financial means at their disposal, such as second pillar pensions (see below), third pillar pensions or wages.

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Graph 8. Cumulative percentage of retired employees by gender and number of full time career years at the time of retirement for those retiring between 2002 and 2004
100 90 80 70 Cumulative percentage 60 50 40 30 20 10 0 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 45 + Number of career years Men Women

Source: Berghman, et al., 2010, p. 42 2.2. The second pension pillar As was previously stated, both employees and self-employed pensioners can have their first pillar pensions supplemented with a pension from the second pillar. We will first discuss our findings for employees and then for the self-employed.

2.2.1. Second pillar pensions for employees Of all pensioners receiving retirement pensions exclusively as employees in 2008 (not combined with a self-employed or civil servant pension) 36 percent were entitled to a second pillar pension.19 As shown in Graph 9, however, this percentage fails to reflect the high variance that is present. Foremost is the significant difference between male and female pensioners. Where 48 percent of men are entitled to a second pillar pension, this is only the case for 18 percent of women. The graph also shows that younger pensioners have greater access to the second pillar than do older pensioners. The relative importance of second pillar pensions as part of total pension protection is therefore increasing. Finally, we see a clear relationship between access to second pillar pensions and the level of the first pillar pension: the higher the latter, the greater the probability of having a second pillar pension.

Pensioners that had previously received their pension in the form of a lump sum are also included in these percentages. For more information, see Berghman et al. (2008, p. 17). 16

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That entitlement to a second pillar pension and level of the first pillar pension is correlated should come as no surprise. As explained above (see 1.1.1), the retirement pension is calculated on the basis of capped wage per career year. Therefore, on any wage higher than this cap, pension contributions are still paid but no additional rights are acquired. This means that the higher the first pillar pension, the more years of the career that were characterized by a wage that is higher than the wage cap. Hence, a second pillar is often needed in order to maintain the same standard of living after retirement. It is, therefore, especially problematic that even in the highest quintiles, 20 to 40 percent of all retired employees are not entitled to a second pillar pension.

Graph 9. Access to second pillar pension by gender, age and level of the first pillar (in quintiles), among retired employee pensioners, 2008
100 90 80 70 60 50 40 30 20 10 0
Total Men Women 60-64 65-69 70-74 75-79 80-84 85+ Q1 Q2 Q3 Q4 Q5

As indicated in the first section, second pillar pensions can be received as a lump sum or as an annuity. Of all 65 year old former employees that combined a employee retirement pension with a second pillar pension, 18 percent received this pension as an annuity; 73 percent as a lump sum, and 9 percent as a combination of both. On average, the net annuity payment was 214 and the net lump sum 84.560. Were a man to invest this lump sum at an interest rate of 3,5 percent and equally spread out the lump sum for the remainder of his life, then he would take up 516 every month (in this text referred to as fictitious annuity) for the next 18 years (life expectancy for men at 65, according to the Department of Economic Affairs (FOD Economie, 2011)). As shown in Graph 10, the above averages hide substantial variation. The graph shows the Lorenz-curve of second pillar pensions paid out as a lump sum or as an annuity. The horizontal axis represents the cumulative number of pensioners receiving second pillar pensions as a lump sum or an annuity; the vertical axis represents the cumulative percentage of the total amount of second
17

pillar pensions paid out as a lump sum or as an annuity. This illustrates what percentage of pensioners are entitled to what percentage of second pillar pensions. In conditions of complete equality, 10 percent of pensioners would receive 10 percent of the entire amount paid on pensions, 20 percent of pensioners would receive 20 percent, etc. The diagonal represents this complete equality. Therefore, the more the curve deviates from the diagonal, the greater the inequality in terms of second pillar pensions.

Graph 10. Lorenz curve comparing the distribution of second pillar pensions paid out as annuity or lump sum to retired employees, 2008
100 90 80 70 60 50 40 30 20 10 0 0 10 20 30 45 40 50 60 70 80 Annuity 90 100 Lump sum

The graph shows that both lump sum and annuity payments are unequally distributed. Approximately half of all people receiving annuities receive only 10 percent of the total pool of annuities, while among those receiving lump sums, this is only 5 percent. On the other hand, we see that 10 percent of those receiving their pensions as a lump sum payment, acquire 50 percent of the total lump sum pool. Among those receiving an annuity, this is 45 percent. From other analyses (see Berghman et al., 2008, pp. 65-70 and Berghman, 2010, pp. 91-93) we know that the level of the second pillar is correlated with gender, age, region and level of the first pillar pension.

18

2.2.2. Second pillar pensions for the self-employed Information regarding second pillar pensions among the self-employed is scarce.20 No data are available on how many retired self-employed receive a second pillar pension. Based on data published elsewhere (FSMA, 2011, p. 39), we do know that in 2008 42.000 self-employed people, ages 55 to 64, contributed to the Free Supplementary Pension for the Self-Employed [VAPZ] (see 1.2). This represents around 30 percent of all self-employed in this age group. Of all pension payments, 98 percent was paid out as a lump sum and 2 percent as an annuity. Of all those initially receiving their pensions as a lump sum, another 2 percent converted this lump sum into an annuity. The average lump sum payment was 26.287, the average annuity 341 per month. No data are available on second pillar pensions for self-employed managers (see 1.2).

2.3. The third pension pillar No data are available on the importance of third pillar pensions (pension savings and individual life insurances) for current pensioners. One can, nevertheless, presume that the relevance of pension savings, in relation to the total pension package, is limited as an individual who annually has contributed the maximum fiscally deductible contribution since 1986 (when this system was first introduced) would receive upon retirement in 2008, either a lump sum of 18.755 (assuming a yearly interest rate of 3,5 percent) or a monthly fictitious annuity (see above) of 114. Considering that the individual life insurance system is older than that of pension savings and that the maximum fiscally deductible contribution is higher, more substantial pension rights could have been built up in this system. Unfortunately, however, no information is available on the importance of individual life insurances for current pensioners.

2.4. Social assistance for the elderly As we have seen, individuals can build up pensions within three pension pillars. In addition, some elderly can rely upon other sources of income (such as rent, savings, etc.). As explained above (see 1.3), if the total sum of all these income sources remains below a legally defined threshold, an individual 65 or older is entitled to an Income Guarantee for the Elderly supplementing his/her existing income up to a certain limit. As this limit is quite low (e.g. below the much used poverty threshold of 60 percent of median equivalent income) we consider reception of social assistance to be an accurate indicator of income insecurity among the elderly.21

As pointed out by Berghman et al. (2008, p. 15) Free Supplementary Pensions for the Self-Employed were not accurately registered in the Pension Register due to divergent interpretations of the legal articles regulating the Sickness and Invalidity contribution. However, since the new Act of April 28 2010 (Wet van 28 april 2010 houdende diverse bepalingen, B.S. 10.05.2010) there is no longer any ambiguity concerning the interpretation of the law with the Free Supplementary pensions consequently having to be declared. Still, a future data project will have to investigate whether these pensions are in fact accurately declared in the Pension Register from 2010 onwards. 21 As pointed out by De Vil (2010, p. 27) the difference between the relative poverty threshold and the Income Guarantee threshold is more substantial for elderly living together than for elderly living alone. To illustrate this difference for 2008: Two elderly living together, who were both receiving social assistance benefits had a total income of 1.148 (574+574). The equivalent poverty threshold for two adults living together was 1.349 (899*1,5). For elderly living alone the difference was less pronounced: 861 (Income Guarantee) versus 899 19

20

In 2008, 5 percent of all individuals over 65 received an Income Guarantee for the Elderly. Given the generally lower pensions built up among women, it is no surprise that this percentage is higher among women (6 percent among women versus 4 percent among men). Furthermore, Graph 11 shows that, among both men and women, the percentage of people receiving social assistance increases with age: The percentage of women receiving social assistance ranges between 4,4 percent (ages 65-69) and 7,4 percent (ages over 85); for men these percentages range from 2,8 percent and 5,9 percent respectively. This tendency is in line with the previously noted negative correlation between age of the pensioner and the level of the first pillar pension (see Graph 4).

Graph 11. Percentage of elderly making use of an Income Guarantee for the Elderly, by age and gender, 2008
10 9 8 7 6 5 4 3 2 1 0 65-69 70-74 Men 75-79 80-84 Women 85+

Of all elderly receiving the Income Guarantee, 83 percent combines this benefit with a first pillar pension. Tables 3 and 4 below provide more insights into this last group of pensioners. Table 3 is broken up according to pension scheme and household composition. The table first shows that reception of social assistance is higher among pensioners living alone (8 percent) than among pensioners living together (2 percent). It further indicates that self-employed pensioners receive social assistance benefits more often than do former employees and civil servants.

(poverty threshold). The reasons for this difference are related to the different equivalence scales used to calculate the Income Guarantee and the poverty threshold. 20

Table 3. Percentage of pensioners combining a first pillar pension with an Income Guarantee for the Elderly by first pillar pension scheme and household composition, 2008 Living alone Living together Total Employee 6 2 3 Self-employed 19 9 10 Civil servant 0 0 0 Mixed 9 4 6 Total 8 2 4 Table 4 is broken down by pension scheme and type of pension (retirement pension, survivors pension or combination of both). Considering that men almost exclusively receive retirement pensions, this table only refers to women. The table shows that women with a retirement pension more often receive social assistance benefits than do women with a survivors pension. However, among the self-employed, the opposite holds true. The reason for this is unclear.

Table 4. Percentage of female pensioners combining a first pillar pension with an Income Guarantee for the Elderly by first pillar pension scheme and type of first pillar pension, 2008 Retirement Survivors Retirement and Total pension pension survivors pension Employee 8 1 1 5 Self-employed 9 15 6 11 Civil servant 0 0 0 0 Mixed 19 11 3 6 Total 8 5 2 5 Given the fact that social assistance is mainly taken up by pensioners living alone (see above), Table 4 is presented once again but only for women living alone. In total, 8 percent of women living alone receives social assistance. If we limit ourselves to women without a survivors pension, this increases to one out of every four women. In absolute terms, this constitutes approximately 20.000 women in Belgium.

Table 5. Percentage of female pensioners living alone and combining a first pillar pension with an Income Guarantee for the Elderly by first pillar pension scheme and type of first pillar pension, 2008 Retirement Survivors Retirement and Total pension pension survivors pension Employee 25 1 1 7 Self-employed 36 3 5 20 Civil servant 0 3 0 0 Mixed 45 2 3 8 Total 23 2 2 8

21

3. CHALLENGES FOR CURRENT PENSION POLICIES On the basis of the information presented in the previous two sections, it is possible to understand four challenges for current pension policy in Belgium. The challenges relate to (1) the existing system of assimilated periods; (2) the current regulations regarding survivors pensions; (3) the manifest differences in social protection offered by the various pension schemes, and (4) the payment modalities of second pillar pensions.

3.1. Solidarity mechanisms underlying assimilated periods Current pension legislation stipulates that first pillar pensions are not only built up during periods of employment but also during so-called assimilated periods (see 1.1.). These are periods that are equated with periods of employment although they do not require pension contributions. This assimilation of periods of unemployment or career interruption, for instance, with periods of employment implies a level of solidarity between those that are employed (contributing to pension build-up) and those that are not employed but that are covered by social security (not contributing to pension build-up). In what follows we will outline the extent of this solidarity. Graphs 12 and 13 show the importance of assimilated periods in providing pension protection for employees (no data are available on assimilated periods for the self-employed and civil servants). The first graph illustrates the importance of assimilated periods for total pension build-up for the cohort of men that reached the legally established retirement age in 2002 (i.e. the 1937 birth cohort).22 Each bar in the graph represents the number of assimilated days as a proportion of the total number of days (assimilated and employed) that are taken into account for pension build-up for a given year. The lowest bar shows that in 1970 this proportion represented 11 percent for bluecollar workers aged 33 and 1 percent for white-collar workers of the same age. The graph shows the considerable importance of assimilated periods in the total pension build-up of the cohort under consideration. For the last 31 years of their careers, 21 percent of the pension build-up of male white-collar workers consisted of assimilated periods; among male blue-collar workers, this was 45 percent (i.e. average across bars). The graph further illustrates the exponential increase of the importance of assimilated periods with age. More than half of the pension rights built up by bluecollar and white-collar employees, aged 54 and 59 respectively, consists of assimilated periods.

More recent data exist but are not made available by the National Pension Office [Rijksdienst voor Pensioenen]. 22

22

Graph 12. Percentage of assimilated days in pension build-up by age, among male blue collar workers and white collar workers, birth cohort 1937
64

59

54

49 Age 44 39 34 100 75 50 25 White collar workers 0 25 50 Blue collar workers 75 100

Source: Peeters & Larmuseau, 2005

Graph 13 presents the same information for the cohort of women that reached legal retirement age in 2002 (at that time age 60), showing that the importance of the assimilated periods is even more pronounced in womens than in mens pensions. During the last 31 years of their careers, 25 percent of the pension build-up for female white-collar workers consisted of assimilated periods. Among female blue-collar workers, this is 50 percent. The correlation between age and assimilated periods is also apparent among women.

23

Graph 13. Percentage of assimilated days in pension build-up by age, among female blue collar workers and white collar workers, birth cohort 1942
59

54

49

44 Age 39 34 29 100 75 50 25 White collar workers 0 25 50 Blue collar workers 75 100

Source: Peeters & Larmuseau, 2005

The above graphs clearly show that the solidarity mechanisms underlying assimilated periods play an important role in pension protection for currently retired employees. Without the presence of this form of solidarity, many women would be considerably more vulnerable financially. This is especially true for the substantial number of women with already low pensions. However, the question remains whether the existing form of solidarity is also the desirable one. As it is, some individuals build up pension rights for non-worked periods, while others do not. The challenge that this presents is clearly illustrated by female employees working part-time (as was the case for 820.000 women in Belgium in 2009). The majority of these women only build up parttime pension rights (see Peeters, Debels, Verschraegen & Berghman, 2008 for an elaboration). As a consequence, their pension protection will be proportionally lower than that of women working fulltime. However, certain other women working part-time do build up full pension rights. This is the case, most importantly, for women covered by career interruption or time credit schemes. Around 120.000 women enjoy this more privileged situation. Therefore, though the reasons for which women opt for part-time work tend to be similar, their pension rights can still vary considerably. As not everyone has a right to time credit or career interruption schemes, and access conditions (such as the number of employees in the firm) have no relation to the reasons why women choose to lessen working hours, one might question whether such a marked difference in pension build-up is justifiable.23

The choices made in the new Coalition Agreement (Ontwerpverklaring over het algemeen beleid, 2011, p. 104) merely lower the level of solidarity implied by the assimilated periods in certain cases but do not 24

23

Comparing the Belgian situation with the Dutch one shows that other forms of solidarity are possible. In the Netherlands, every individual aged 65 and older receives the same basic pension, which is awarded on the basis of citizenship. This unconditional basic pension is supplemented by a second pillar pension, the level of which depends on the number of years the individual has worked. In the Belgian system, the highest rights are built up during periods of employment or assimilation (in the first case sometimes supplemented by a second pillar pension) and no pension rights are built up during periods that are not assimilated. In the Dutch system, on the other hand, the highest pension rights are allocated to those individuals with a full career (basic pension plus second pillar pension); those that have not worked for a certain period of time for whatever the reason build up lower rights (only the basic pension). It can be argued (see Peeters & Larmuseau, 2005, pp. 118-121) that such an unconditional basic pension better reflects the different goals that, according to the OECD (2003), can be assigned to assimilated periods, such as to combat poverty among the elderly, to minimize inequality between men and women, to support unpaid work and to reflect the insurance principle in the pension scheme.

3.2. Survivor pensions As indicated in section 1.1.2, with the survivors pension the widow(er) is entitled to 80 percent of the deceased spouses retirement pension. Consequently, if both spouses together were entitled to one retirement pension at the family rate of 1.250, the surviving spouse would then be entitled to a retirement pension of 1.000 (80% of 1.250). In order to estimate how advantageous this survivors pension is when compared to the retirement pension both spouses received previously, the relationship between the pension amount before and after the spouses death is calculated. To do this, once more we make use of equivalent pension income (see above). In our example, prior to his/her spouses death, the partner is entitled to an equivalent pension income of 833 (1.250/1,5). After the death of the partner, the spouse is entitled to 1.000, 20 percent more than the equivalent pension received before. That widow(er)s are exceptionally well protected in Belgium is illustrated in Graph 14. In that graph, the proportion of the equivalent pension income after and before the death of the marriage partner is presented for Belgium and for a number of other EU-countries. With a proportion of 120 percent, Belgium ranks very highly.24 Only in Poland and Luxemburg is the proportion even higher.

redistribute it. In more specific terms, for certain periods of unemployment, early retirement [brugpensioen], career interruption and time credit, pensions will no longer be calculated on the basis of the previous wage but on the basis of a fixed minimum wage, resulting in lower pension benefits. 24 A less advantageous comparison holds for widows that combine their own retirement pension with a survivors pension. See Peeters, Debels & Berghman (submitted for publication). Similarly, civil servants survivors pensions are (in general) less beneficially calculated. See section 1.2. 25

Graph 14. Proportion of equivalent pension income after the death of the marriage partner as compared to before the death of the marriage partner in a number of EU-countries
140 120 100 80 60 40 20 0 Netherlands Portugal United Kingdom Czech Republic Luxembourg Estonia Hungary Austria Ireland Italy Finland Denmark Germany Belgium Sweden Poland France Latvia Spain

Source: own calculations based on James, 2009, p. 67

It has been shown before in Graph 5 that women with a survivors pension are well protected. Women with a retirement pension receive a pension of 851 on average; women with a survivors pension, 997, and women that combine both pensions receive 1.129. Thus, women living off a survivors pension on average have higher pensions than women with only a retirement pension. This is also apparent when we consider the data on social assistance beneficiaries. Women receiving survivors pensions, supplement their pensions less often with a social assistance benefit than do women with only a retirement pension (cf. 2.4). The survivors pension therefore succeeds, to a large extent, in keeping widows (one of the most financially vulnerable groups in society) out of poverty. Just as with pensions based on assimilated periods, survivors pensions also introduce an high degree of solidarity in the Belgian pension system. However, once more, the question remains whether this particular form of solidarity is what is called for. In the next sections, the existing system is critically evaluated. Thereafter, a number of possible alternatives are provided.

3.2.1. The declining importance of marriage The number of divorced couples is increasing steadily. To illustrate: 8 percent of marriages that took place in 1955 ended in divorce after 25 years. In 2000, this 8 percent was already reached after only 5 years of marriage (Matthijs, 2009, p. 81). The number of marriages that end in divorce rather than death therefore continues to grow. Pension protection for divorced women is, however, radically different than that for widowed women. As specified above, a widow is entitled to 80 percent of the (family) pension calculated at the family rate of 75 percent of the previous income. Her pension thus
26

equals 60 percent of her husbands career salary (80% of 75% = 60%). The divorce pension, on the other hand, only amounts to 62,5 percent of the husbands pension rights per year of marriage and calculated at the single rate of 60 percent of the previous wage. This means that a divorced woman will, at the most (i.e. after a marriage of at least 45 years), receive 37,5 percent (62,5% of 60%) of her ex-husbands previous wage. This differential social protection is clearly reflected in the data. The average pension of women aged 64 in 2007/2008 and receiving a divorce pension was only 792 (compared e.g. to the average survivors pension in the employee scheme of 948). Also the percentage of divorced women receiving a social assistance benefit is high, more precisely 30 percent (35 percent among single women receiving a divorce pension). Moreover, these figures do not include women previously married to civil servants, who are not entitled to a divorce pension at all. The same holds true for the increasing group of women who are cohabitating rather than marrying [wettelijk of feitelijk samenwonend].

3.2.2. Deactivation of employment Section 1.1. made clear that a first pillar survivors pension - just as with a retirement pension - can only be combined with wages up to a certain earnings limit. Once this limit is exceeded, the survivors pension has to be reimbursed. This has serious implications for the pensioner. Since there is only a minimal age requirement to receive a survivors pension (see 1.1.2), women (or men) at working age can be eligible for a survivors pension. Understandably, employed widow(er)s may come to question whether continued employment is financially worthwhile. As shown by previous empirical research, out of the 1.600 women that were employed in 2002 before their husbands passed away, 73 percent stopped working or opted for reduced employment the year thereafter (Taelemans, Peeters, Curvers & Berghman, 2007). This de-activation can most likely be ascribed to current legislation on survivors pensions.25

3.2.3. Changes in the labor market The current system of survivors pensions emerged in a period when the male breadwinner model was the norm. In this model, the head of households employment activities served as the axis around which a familys social protection was organized. The husband was protected by his own social rights; the wife and children were protected by so-called derived rights, contingent upon those of the husband. Following this line of reasoning, it was assumed that women did not work outside the home. This assumption is, of course, no longer accurate. While in 1960 less than 30 percent of women were active in the formal labor market, four decades later this proportion had risen to 45 percent (Gieselink, et al., 2003). Today, the simultaneous existence of households that rely on the traditional male breadwinner model and households where both partners have a full-time career,

In a vague part of the Coalition Agreement (Ontwerpverklaring over het algemeen beleid, 2011, pp. 104105) this de-activating effect of the current legislation on survivors pensions is planned to be counteracted by restricting the right to survivors pension to only a limited period (the duration of which depends on age, duration of the marriage and the number of children). 27

25

leads to absurd situations that call into question the logic behind the current system of survivors pensions. This situation is illustrated in table 4 using two fictitious families (based on Raes, 2009).26 At the household level, both family 1 and family 2 have an income of 3.000. In family 1, this salary is distributed between husband and wife, while in family 2 the husband is the sole incomeprovider. Nevertheless, the pensions of the two families are radically different. Family 1 receives two retirement pensions calculated at the single rate of 60 percent. Family 2 receives one family pension calculated at 75 percent of the husbands income. As shown in table 6, this results in a markedly higher pension for family 2. Furthermore, this inequality persists when the husband passes away: The wife in family 1 is allowed to combine her retirement pension with a survivors pension for up to 110 percent of the amount of the survivors pension (see 1.1.). The wife in family 2 receives a survivors pension that equals 80 percent of the former family pension. Despite the fact that both families enjoyed the same standard of living prior to retirement, the pension of the wife that did not work is almost 60 percent higher than that of her employed counterpart (1.800 versus 1.056). Table 6. Income, pension before and pension after the husbands death in two families Family 1. Both partners work During the career Pension before the Pension after the husbands death husbands death Husband Career 45 years 60% of 1.600 = 960 / Wage 1.600 Wife Career 45 year 60% of 1.400 = 840 110% of 960 = 1.056 Wage 1.400 Household Wage 3.000 Pension 1.800 / Family 2. Only the husband works During the career Pension before the Pension after the husbands death husbands death Husband Career 45 year 75% of 3.000 = 2.250 / Wage 3.000 Wife / / 1.800 Household Wage 3.000 Pension 2.250 /

3.2.4. Alternatives Merely abolishing the survivors pension does not seem an appropriate solution to the abovementioned anomilies. As shown above, the survivors pension offers financial protection to a large group of women that would otherwise be highly vulnerable in old age. Furthermore, as in the Netherlands, such an abolition would lead to increased reliance on survivor s pensions in the second and third pension pillars. However, these pensions are much more difficult to regulate and are more unequally distributed. As such, abolishing survivors pensions would lead to a situation in which tax expenditures (i.e. revenue forgone as a consequence of various tax exemptions, for instance; Brixi, Valenduc & Swift, 2004) are spent on building up survivors benefits only for those benefiting from (generous) second pillar pensions and those with enough financial means to provide for their own third pillar pensions. Therefore, merely abolishing survivors pensions is not a sound solution to the
The data used in the example are chosen in such a way that the wage ceiling does not apply and that no minimal pension rights are granted (see 1.1). Changing these conditions would change the implications somewhat, though not fundamentally. 28
26

above mentioned problems. As shown above, however, re-thinking the existing solidarity mechanisms has become all the more necessary. The following alternatives can be considered (partly based on Raes, 2009): Survivors pension as fixed amount: Rather than basing pension benefits on the previous wage of the spouse, the survivors pension would be a fixed amount. Splitting of pension rights: The acquired pension rights would be the sum of both partners rights divided equally between both. For an elaboration, see Berghman, Pieters, Schokkaert & Schoukens (2005) and Schoukens & Pieters (2007). Survivors pensions determined by the number of years married: In the current system, one is entitled to a survivors pension calculated on the basis of the deceased spouses full career after only one year of marriage. This differs from the calculation of the divorce pension, where the derived rights depend on the number of years of marriage. The same principle would also be applied to the survivors pension. Derived rights only after supplementary pension contributions: Currently, no additional contributions are required by married couples in order to receive survivors benefits. Therefore, those who would want to build up survivors benefits would be obliged to pay a supplementary contribution. Establishing an unconditional basic pension based on citizenship and abolishing survivors pensions .

3.3. Differences between pension schemes As shown before, significant differences exist in pension protection depending on the pension scheme in which rights have been built up. Civil servants have an average net pension income of 1.599, employees 994, the self-employed 663 (see Graph 6 above). These differences in average pension income are also reflected in the percentage of people that fall back on social assistance: civil servants generally make no use of the Income Guarantee for the Elderly, employees in 5 percent of the cases; among the self-employed this is 11 percent (see Table 4 above). The question remains whether these vast differences in pension schemes are justifiable and if not - how these differences can be minimized. To this end, we first compare civil servants and employees and thereafter, the lower pensions of the self-employed .

3.3.1. Civil servants versus employees The average civil servant first pillar pension is generally higher than that of an employee (cf. Graph 6 above). However, this comparison is deceiving seeing as how second pillar pensions are virtually nonexistent among civil servants while frequent among employees. Therefore, a more accurate comparison between civil servants and employees has to include second pillar pension take up. In Graph 15, we make such a comparison. In this graph, only retirement pensions are considered, since the most accurate data on second pillar pensions are available for this type. Second pillar pensions, paid out as lump sums, have been converted into fictitious annuities (cf. above).

29

Graph 15 illustrates that the pension gap between civil servants and employees diminishes when second pillar pensions are taken into account. Without second pillar pensions, the difference between the two groups is 649 (519 for men; 857 for women) in favor of civil servants. After taking second pillar pensions into account, the gap become smaller. Nonetheless, the total average pension for civil servants is still 502 higher (299 for men; 821 for women) than for employees. These differences are striking, even more so because civil servants with a normal labor contract as opposed to tenured civil servants - build up employee pensions (cf. above, 1.1.1), while both types of civil servants quite often carry out the same work for the same service.27 Furthermore, second pillar pensions for civil servants under a normal labor contract, to this day, remain only minimally developed.

Graph 15. Average monthly net retirement pension of civil servants and employees, by gender and (for employees) by whether or not second pillar pensions are taken into account, 2008
2000 1800 1600 1400 1200 1000 800 600 400 200 0 Total pension civil servants Total First pillar pension employees Men Total pension employees Women

There are two ways in which to be rid of these pension inequalities. Either civil servants pensions are reduced or those of employees are raised. The first option entails reforming the distinct civil servant pension scheme in such a way as to gradually make it equivalent to that of employees. This option would indeed eliminate inequality, but it would also cut back on the only pension scheme that has successfully maintained the two goals that are traditionally ascribed to pension systems, i.e. keeping the elderly out of poverty and maintaining living standards. Furthermore, in the long run this would lead to an increasing reliance
Some argue that civil servants wages are lower than those of employees and, consequently, they should receive higher pensions as a form of deferred payment However, this seems unfounded. See Eugne (2011). 30
27

on second pillar pensions for civil servants. It is not certain that this evolution would be a desirable one, at least not if no fundamental changes are made to current second pillar pension regulations. Such an evolution would simply transform the existing inequality between civil servants and employees into two new inequalities: First, one between retirees with second pillar pensions and those without, and second, one between retirees with low second pillar pensions and those with high ones. The current inequality, induced by the prevailing second pillar regulations, is illustrated in Graph 16. The comparison is limited to the male population since the variance among the female population largely reflects differences in the number of years worked rather than differences in pension schemes. Lump sums are again transformed into fictitious annuities. The graph first illustrates the larger inequality among male employees than among male civil servants (cf. colored bars). In the highest quintile, employee pensions are higher than those of civil servants (2.552 versus 2.248); while in the lowest quintile the opposite holds true (719 versus 1.030). The graph further shows that the highest total pensions are not found among civil servants, but among employees with a second pillar pension (with an average pension in the highest quintile of 3.233). Finally, the graph points to the importance of the differential fiscal treatment of first and second pillar pensions (cf. compare colored and white bars). The higher pensions for employees with a second pillar pension can exclusively be attributed to the more advantageous fiscal treatment of lump sum payments. In short, in order to diminish the existing inequality among pensioners, a progressive taxation of lump sum payments or the introduction of a maximum ceiling for second pillar pensions seems more appropriate than reducing the pensions of civil servants.28

The new Coalition Agreement (Ontwerpverklaring over het algemeen beleid, 2011, p. 105) stipulates that the fiscal advantages for second pillar pension contributions will only be granted if the combination of the first and second pillar does not exceed a maximum civil servant pension. So far, in the discussions this regarding, this maximum pension is considered in gross terms. However, as the graph illustrates, such a ceiling is only useful when framed in net terms. 31

28

Graph 16. Quintile distribution of the average monthly gross (white bar) and net (colored bar) pension of male civil servants, male employees and male employees with a second pillar pension, 2008
4000 3500 3000 2500 2000 1500 1000 500 0 Civil servants All employees Employees with a second pillar pension

A second option to reduce the existing inequality between civil servants and employees would be to raise the pensions of the latter. This could be done by raising first pillar pensions or by democratizing (adequate) second pillar pensions for employees. Unfortunately, increasing the contribution rate for first pillar pensions is likely not feasible as long as the legitimacy of the current first pillar pension scheme remains low. In the meantime, second pillar pensions should be further democratized; this implies that second pillar pension build-up should be highly prioritized in future wage negotiations.

3.3.2. Low first pillar pensions for the self-employed As pointed out by previous analyses, first pillar pensions for the self-employed are low (average of 663; 833 for men; 506 for women). The next graph shows the variation behind these low averages. Again, in order to minimize variability due to the often short careers of female pensioners, the results refer only to men. The graph shows that the modal self-employed man with a pension at the single rate receives a pension between 800 and 899; the modal man with a pension at the family rate receives a pension between 1.100 and 1.199. It is illuminating to compare these amounts to the income ceiling used in the social assistance scheme. For two individuals living together in 2008 this limit was 1.148; for one person households it was 861. It is therefore not surprising that among the retired self-employed, 19 percent of one-person households and 9 percent of two-person households rely on social assistance. More surprising is that respectively 81 and 91 percent of these households do not make use of social assistance benefits. This shows that the majority of the self-employed have other income sources at their disposal, such as second and third

32

pillar pensions. However, as was stated previously, only limited information is available on these pensions, significantly hampering a proper debate on the pension protection of the self-employed. Graph 17. Distribution of the level of first pillar pension of men only receiving a pension from the selfemployed pension scheme, by rate, percentages
30

25

20

15

10

0
0-99 200-299 400-499 600-699 800-899 1000-1099 1200-1299

Single rate

Family rate

Given the above figures, it is not surprising that pressure groups for the self-employed argue in favor of raising the self-employeds first pillar pension. However, such a pension increase would be difficult to justify without an accompanying increase in contributions among the self-employed since the social security benefits of the self-employed are to a large extent financed by other means than their own contributions (i.e. state and alternative financing). More concretely, social security expenditure for employees is financed for 71 percent by their own contributions, while for the self-employed, this is only 63 percent (FOD Sociale Zekerheid, 2007, pp. 22 & 44). The problem of financing adequate pensions for the self-employed is not only a matter of low contribution percentages. Graph 18 presents the percentage distribution of the gross yearly incomes of the self-employed. The graph shows the large percentage of the self-employed with very low incomes. More specifically, in 2007 47 percent of the self-employed had a gross income lower than 17.353 a year. To compare, in 2007 the minimum wage used in the employee pension calculation [cf. Minimumrecht per loopbaanjaar; see note 8] was 17.674. Therefore, any sound solution to the low pensions of the self-employed has to take into account the very low incomes of many selfemployed individuals. One possible solution would be to calculate the pensions of the self-employed based on a fixed wage, as was the case before 1984. An indication that the current low pensions of the self-employed are in part attributable to the increasing use of real wages in pension calculation is provided in Graph 19. This graph shows the average monthly net first pillar pension of self-employed men by age. Contrary to the general situation (see Graph 4), the level of the first pillar pension of the
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self-employed is negatively correlated with age, suggesting that the greater the degree to which the pension is calculated on fixed wages (cf. years before 1984), the higher the self-employed pension.

Graph 18. Percent distribution of gross income of individuals who are self-employed as their main occupation [zelfstandige in hoofdberoep], income 2007
45 40 35 30 25 20 15 10 5 0 < 8.676 8.676 - 17.353 17.353 - 49.579 49.579 - 74.368 > 74.368

Source: National Agency for the Social Security of the Self-Employed [Rijksdienst voor de Sociale Verzekering van Zelfstandigen; RSVZ]

Graph 19. Average monthly net first pillar pension of self-employed men by age, 2008
1000 900 800 700 600 500 400 300 200 100 0 60-64 65-69 70-74 34 75-79 80-85 85+

3.4. Lump sum payments in the second pension pillar As shown before, 73 percent of all 65 year old pensioners received their second pillar pension exclusively as a lump sum; 18 percent as an annuity, and 9 percent combined both. From other calculations we know that in 2008 78 percent of the entire amount paid out in the second pillar (and registered in the Pension Register) was paid out in lump sums.29 International literature on the manner in which second pillar pensions are paid out in other countries is very limited. However, the little OECD data (Antolin, Pugh & Stewart, 2008) that do exist seem to suggest that the high percentage of lump sums in Belgium is exceptional. In most countries, all or part of the second pillar pension is required to be paid out as a (life) annuity. Contrary to most other countries, not only can a second pillar pension be offered exclusively as a lump sum payment, but it is even advisable to do so given the differential tax treatment of lump sums and annuities (cf. 1.1.). Also, due to the progressive taxation of annuities, the higher the lump sum payment, the greater the fiscal benefit. However, lump sums have not always received such beneficial tax treatment. Before 1985, lump sums were transformed into fictitious annuities and taxed as regular annuities. Though this is hard to understand, one of the initial reasons why the current system of fixed taxation was introduced, was to rectify the differential tax treatment of lump sums and annuities.30 This new way of taxing lump sums might help to explain why the percentage of pensioners receiving at least part of their second pillar pension as an annuity has decreased markedly since 1985 (cf. Graph 20).31 It can be argued that the tax advantages granted to second pillar pensions imply that these pensions should be used as an instrument of social policy. In the Belgian context, the second pension pillars main goal is to facilitate the maintenance of living standards enjoyed during working life, especially for those employees for whom the first pillar fails to do so. This goal, however, can only be accomplished if these pensions are granted as a lifelong monthly (and preferably price adjusted) supplement to first pillar pensions. To that end, lump sums are not the right instrument. As an individual cannot know his remaining life expectancy, he cannot know how to spread his lump sum over his remaining years. When spending too much, no pension is left to provide for the final years of his life; when spending too little, the fiscal advantages granted to second pillar pensions will have been used to augment ones inheritance. Therefore, one could argue that annuity payments should be made mandatory or that at least (as a first step) should no longer be taxed less advantageously than lump sums.32 Putting aside the discussion on the exact level of the taxes that should be

This figure may be an underestimation as second pillar pensions for the self-employed are not adequately registered in the Pension Register and these pensions to the extent that this information is available (cf. 2.2) are even more often paid out as lump sum payments. 30 Memorie van toelichting bij het wetsontwerp houdende fiscale bepalingen, Kamer van Volksvertegenwoordigers, zitting 1984-1985, 23 oktober 1985, p. 1. 31 For a more detailed discussion of the graph, see Berghman et al. (2008, pp. 45-49). The higher percentage of pensioners with a second pillar annuity payment from 1999 onwards can be attributed to the fact that before 1999 annuities paid out by the construction industry (PC 124) were considered supplementary holiday payments and hence not declared in the Pension Register. 32 Art. 28 of the Act on Supplementary Pensions (Wet van 28 april 2003 betreffende de aanvullende Pensioenen en het belastingstelsel van die Pensioenen en van sommige aanvullende voordelen inzake sociale zekerheid, B.S. 28 april 2003) stipulates that lump sum payments can be transformed into annuities so that the fiscally disadvantageous treatment of regular annuities is not applicable. As this stipulation implies that the default way of paying out the second pillar pension is as a lump sum payment, and the individual can only afterwards 35

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imposed, it is furthermore advisable that - as was the case before 1985 - lump sums should be converted into fictitious annuities and taxed progressively.33

Graph 20. Percentage of retired employees with a second pillar pension at least partly paid out as an annuity, by year of retirement, 1985-2008
50 45 40 35 30 25 20 15 10 5 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

decide to transform this lump sum into an annuity, it does not rectify the disadvantageous fiscal treatment of pension benefits by default paid out as an annuity. 33 We believe this is also in line with the thoughts of the new government. The present coalition agreement (Ontwerpverklaring over het algemeen beleid, 2011, pp. 105-106) and the recent changes to fiscal regulations adjusts the tax advantages granted for second pillar pensions built up by employee contributions. Previously, and within certain limits the tax advantages granted were progressive (the higher the wage, the higher the tax benefit). The new coalition agreement changes this: the tax advantage granted for second pillar pensions built up through employee contributions will be the same for every employee, irrespective of his/her wage. However, again for fiscal reasons (see Gieselink et al., 2003, pp. 39-40), the majority of second pillar pensions are exclusively built up by employer contributions and inconsistently - the tax advantages granted to these pensions remain progressive. This can easily be illustrated by means of a (simplified) comparison between the taxation of wages versus taxation of second pillar pensions. On wages, first a fixed percentage of social security contributions is deducted; then the remaining amount is taxed progressively (cf. the higher the wage, the higher the average percentage of income tax). However, on pension contributions, a lower percentage of social security contributions is due and no income taxes apply. As a consequence, the higher the wage, the greater the tax advantages granted for second pillar pensions. Second pillar pensions are again taxed in the payment phase but at a fixed percentage. Therefore, the tax advantages granted remain progressive. In this way, progressively taxing second pillar pensions at the payment phase would counteract the progressive nature of the tax advantages which are currently granted to the large majority of individuals building up second pillar pensions by means of employer contributions.

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CONCLUSION Current scientific and political discourse on pension reform mainly centers on the affordability of pensions. In doing so, the primary goal of providing pension protection for the elderly is to a large extent disregarded. To compensate for this neglect, this contribution focused on the social adequacy of current pension protection. To that end, we first provided an overview of pension regulations. In order to verify how those regulations translate in practice, we investigated the de facto division of existing pension benefits stemming from first and second pillar pensions among the Belgian pensioner population. Based on our findings, we were able to identify and examine four challenges for current pension policies, i.e. the challenges related to the existing system of assimilated periods; the current regulations regarding survivors pensions; the manifest differences in social protection offered by the various pension schemes and the payment modalities of second pillar pensions. These four challenges are in no way the only ones facing the current pension system. Other challenges, both more general (e.g. how to raise the retirement age in such a way so as not to be detrimental to the most disadvantaged) as well as more technical (e.g. reform of the 80% limitation) are also central to the current pension debate. Furthermore, our empirical investigation is by no means final. In order to have a more definitive understanding of the dual goals of pension protection (i.e. minimum protection and standard of living protection), our empirical analyses have to be complemented in at least the following ways: On the basis of calculations by the OECD (2011), as well as by the Federal Public Service Social Security (ISG, 2010), useful information is available on replacement rates for fictitious individuals. However, as shown elsewhere (Peeters, Debels & Berghman, submitted for publication), it is necessary to complement these theoretical replacement rates with empirical ones, investigating the replacement rates applied to the average pensioner or certain subgroups of pensioners (e.g. as is done by Myles and collaborators for Canadian pensioners; LaRochelle-Cot, Myles & Picot, 2010). The results presented in this paper focus on first and second pillar pensions of current pensioners. Unfortunately, this information has not yet been linked to previous career data. And only by linking pensions to career data can several important research questions be answered, such as the relative importance of insurance and solidarity logics in the current pension system. Until now, only pension income of current pensioners has been analyzed. It is well possible, however, that pensioners often supplement their pensions with other sources of income, such as invalidity benefits (e.g. the care for the elderly subsidy [tegemoetkoming voor hulp aan bejaarden]). Nevertheless, our understanding of these benefits is currently very limited. Accordingly, further analyses should point out how these benefits complement overall pension protection. Given the low first pillar pensions for the self-employed, there is reason to believe that second pillar pensions for this group are very well developed. However, the administrative information on these pensions has not yet been analyzed. Therefore, future research should investigate the reliability of the newly available data on these benefits.

The data necessary to tackle the above issues are available, and therefore could be analyzed in the near future. However, still more efforts need to be made by administrations to disseminate essential information needed for the current pension debate. Most importantly, there is currently no

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knowledge concerning the importance of third pillar pensions for current pensioners. Even though third pillar pensions are promoted by officials as a way to supplement first pillar pension income, the existing data that would allow researchers to assess the importance of these benefits in the total pension package is not accessible. We sincerely hope that further empirical research as well as an informed debate on the challenges facing our pension system by the various pension policy stakeholders will lead to the development of a pension system that many consider just and adapted to the new societal developments that have taken place over the last decades. Only in this way can a pension system be put into place that is both legitimate and resilient against the financial pressures on pension protection.

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