AIECE Working Group on Longer-Term Prospects and Structural change 5 November 2007

1. Long-Term Prospects for Belgian Social ProtectionPresentation: Nicole Fasquelle, Senior Associate, Federal Planning BureauAuthor: Team « Social Protection , Demography and Prospective », FPB AIECE Working Group on Longer-Term Prospects and Structural change 5 November 2007 www.plan.be – nf@plan.be

2. Structure of the presentation • The public Belgian social protection system and population ageing • The institutional bodies studying the effect of ageing on public finances • A possible scenario for the future • Conclusions

3. The public Belgian social protection system • Act of 28 December 1944 establishing the social security for all workers The total social expenses represent 23.2% of GDP in 2005. Distribution of social expenses among branches in 2005: pensions: 39% health care: 31% unemployment : 12% family allowances: 7% others: 11% • Bismarckian system = insurance system: the contributions finance the social expenses (versus Beveridgian system or assistance). In practice, mixed system in Belgium. Weight of the financing sources in 2005: 68% contributions and 32% taxes. • Public pensions system based on the pay-as-you-go system

4. A future challenge for social protection: population ageing • Population ageing (or ageing demography) occurs when a growing part of the population reaches greater ages (modification of the global age structure). • This can result from declining fertility, or rising life expectancy, or from a combination of those two phenomena called « demographic transition ». This is the case in the most industrial countries and so in Belgium. • Those demographic phenomena can add further to historical factors. In Belgium, the less peopled generations born from 1965 onwards have low fertility rates. The many generations born after WWII are currently reaching retirement age and will live longer.

5. A rising life expectancy is a progress for humanity… but a burden for public finances. • Decline in the population aged between 15 and 64, which is most likely to pay contributions. This means a decrease in the revenues for the State (see insurance system of the social security). • Increase in the population aged 65 and more, which is most likely to get a statutory pension. This means a rise in the public expenses (see statutory pensions based on the pay-as-you-go system). • Risk of a new large public deficit and of a new snowball effect for the public debt.

6. II. Institutional organizations studying the effect of ageing on public finances • At the international level • IMF: specific studies • OECD: Economic Policy Committee (either own projections or international exercises for which every country delivers its estimations – Federal Planning Bureau for Belgium) • European Commission: GD ECFIN, Ageing Working Group established in 2000 by the Economic Policy Committee of the ECOFIN Council (international exercises for which every country delivers its estimations for pension expenditures, sticking to common assumptions – Federal Planning Bureau for Belgium)

7. Institutional organizations • In Belgium • In 1987, at the request of the government, the Federal Planning Bureau started to develop the Maltese system of models in order to assess the long-term social expenditures within the overall framework of public finances. This was done within the framework of the statutory mission of the FPB to support economic policy-making. • From 1987 to 2001, the Maltese system of models was used at several times, either on the initiative of the FPB or to support economic policy-making (especially for measuring the impact of various statutory public pension reforms in Belgium: 1990, 1996). • In 2001, the Law guaranteeing a continuous reduction in public debt and the setting up of the Ageing Fund.

8. The Law of 5 September 2001 guaranteeing a continuous reduction in public debt and the setting up of the Ageing Fund • Goal of the Fund: to build up a demographic reserve to finance the supplementary expenses pertaining to the statutory pension schemes due to ageing during the period 2010-2030, so long as public debt has been reduced to 60% of GDP • Study Committee for Ageing: Yearly report about the budgetary and social implications of ageing (estimation of the budgetary cost of ageing and specific studies) – the Federal Planning Bureau entrusted with the technical and administrative secretariat • The department « Borrowing requirements of the Public Sector » of the High Council of Finance: Yearly Advice with recommendations for budgetary policy (based on the annual report of the Study Committee for Ageing) • Federal Government: Yearly « Memorandum on Ageing » (based on the annual report of the Study Committee of Ageing and the annual Advice of the department « Borrowing requirements of the Public Sector » of the High Council of Finance)

9. III. A possible scenario for the future The tool: the Maltese system of models • System of models: one central model and several specific peripheral models (computing the number of pensioners, average pensions, health care…)

10. The Maltese system of models Demography by gender and age Socio-demography by gender and age group 1 2 • Central model Maltese • macroeconomic projection • final socio-economic projection • social policy and budgetary strategy • budgetary cost of ageing • public sub-sectors accounts 5 3 5 Calculation of number of pensioners by scheme, gender and age 5 4 Calculation of the average pension for self-employed Calculation of the average pension in the civil servants scheme Calculation of the average pension in the wage-earner scheme 4

11. The Maltese system of models • Mecanical and accounting models adequate for translating demographic projections into budgetary developments (social security account and global public finances account) • Special attention is paid to modelling social expenses according to the calculation rules (legislation), often by scheme, gender and age: number of beneficiaries (new and other), average benefits (ceiling, minimum, indexation rules…) • Baseline with no change in legislation, rules and policy • Prospective exercise up to 2050 (scenarios with hypotheses) No real macroeconomic modelling, no endogenous reaction of policy

12. The Maltese system of models • Uncertainty around the hypotheses: • Demographic (in 2050): fertility rate 1.75 life expectancy at birth M 83.9 / W 88.9 net immigration flow 17320 • Socio-economic: population breakdown among socio-economic categories (employment, unemployment, disability, students, pensioners) Probabilities of transition from category X to category Y by age and gender (bottom-up approach), based on behaviour in recent years (including effects of reform already decided) Except for employment and unemployment by age and gender: Nairu assumption (top-downapproach)

13. The Maltese system of models Population breakdown among socio-economic categories

14. The Maltese system of models • Uncertainty around the hypotheses: • Economic: Structural unemployment rate in 2030 8% Employment (average annual growth rates between 2000 and 2050) 0,1% Labour productivity (or wage growth) – (average annual real growth rate) 1,75% • Social policy (average annual real growth rate) : Wage ceiling 1,25% Welfare adjustment 0,5% Lump-sum benefits adjustment 1,0% • Budgetary policy: revenues: unchanged fiscal and parafiscal pressure non-age related expenditures: mostly related to the GDP budget balance strategy: see further

15. Social expenditures calculationin percent of GDP • In general: Social expenditure = number of beneficiaries x average benefit GDP employment x labour productivity with Average benefit = social benefit (pension, unemployment…) number of beneficiaries of the allocation Labour productivity = total production = ___GDP___ employment employment • Except for the health care expenditures: • long-term care: hierarchical model with probabilities • acute care: econometrical equation with demographic drivers and non-demographic drivers (observed profile by age and gender of per capita health care expenditures, population prospects, indicator of the effect of population structure on health care expenditures, GDP per capita)

16. The budgetary cost of ageing(or the evolution of the total social expenditures in % of GDP) Large increases in pensions and health care expenditures. Decrease in the other social expenditures: especially family allowances and unemployment benefits.

17. Financial sustainability of the public finances Facing the budgetary cost of ageing through a reduction in public debt (see Law of 5 September 2001)? It is a possible solution provided that the debt has been sufficiently reduced by 2010 so that a new snowball effect is avoided. One possible budgetary strategy: • Until 2010 the « Stability Program of Belgium » foresees budgetary surpluses, going from 0.3% of GDP in 2007 and growing up to 0.9% of GDP in 2010. • From 2011 onwards, the High Council of Finance recommends, in his « Advice » of March 2007, to have growing budgetary surpluses until 2017-2019 (2% of GDP), then to gradually return to the equilibrium around 2035, and afterwards to converge to a deficit about 1% of GDP in 2050. • If this budgetary strategy is applied, then the budgetary cost of ageing is sustainable. • This implies a very strict budgetary policy, with either a rise in the revenues, or a decrease in the expenses, or both of them.

18. Political and social sustainability • Political sustainability: a mechanism in the calculation of the wage-earner pension (the wage ceiling) implies that the pensions become less and less proportional to the contributions. In this context, will the workers still be willing to pay contributions? • Social sustainability: problem of the social benefits level. In absolute terms or poverty: at present, the social beneficiaries run a greater poverty risk than the workers and the minimal benefits are lower than the poverty threshold. In relative terms when comparing the average social benefits to the average workers revenues (benefit ratio): there is a difference between the average social benefits and the average workers revenues, which is growing in time of the projection (deterioration of the benefit ratio).

19. IV. Conclusions about the long-term prospects • Financial, political and social sustainability: prudence and vigilance • The Prospects are based on scenarios  sensibility analyses are carried out in which some hypotheses are modified. The results either improve (or deteriorate): • productivity more (less) high • employment rate more (less) high • What is the strategy of the Belgian government? • To reduce the public debt and put money in the Ageing Fund • To increase the employment rate (especially of the young and the older people) • Statutory pension: adaptation of the wage ceiling, adaptation to welfare • To raise the minimum pensions and the social aid for the elderly (Guaranteed income for the elderly) • The Occupational Pensions Law of 13 March 2003

20. Bibliography • Federal Planning Bureau, “Financial prospects for social security 2000-2050 . Ageing and sustainability of the public pensions», Planning Paper 91, Federal Planning Bureau, 2002 (see website: http://www.plan.be) • High Council of Finance – Study Committee for Ageing – Yearly reports – april 2002, may 2003, april 2004, may 2005, june 2006, june 2007 (see website : http://www.plan.be) • High Council of Finance, Department « Borrowing requirements of the Public Sector», Advices and yearly reports