LongTerm Prospects for Belgian Social Protection Presentation: Nicole Fasquelle, Senior Associate, F

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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_at_plan.be
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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

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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

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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.

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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.

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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)

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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.

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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)

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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)

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The Maltese system of models
Demography by gender and age
Socio-demography by gender and age group
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• Central model Maltese
• macroeconomic projection
• final socio-economic projection
• social policy and budgetary strategy
• budgetary cost of ageing
• public sub-sectors accounts

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Calculation of number of pensioners by scheme,
gender and age
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5
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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
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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

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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-down approach)

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

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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)

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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.
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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.

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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).

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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

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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