Belgium Faces Pension Sustainability Challenge Amidst Euro-Area Demographic Shift: A Comparative Analysis and Policy Perspectives

In November 2023, a comprehensive analysis delves into the sustainability of public spending on pensions in Belgium, especially in comparison with other euro area countries.

Belgium, like its European counterparts, is grappling with the challenges of an aging population. The proportion of pensioners is set to surge in the coming decades, while the working-age population dwindles. This demographic shift poses a fiscal strain, prompting concerns about the viability of public spending on pensions in Belgium. The key questions revolve around the comparative pension expenditure in Belgium, the underlying reasons for any discrepancies, and potential policy measures to enhance financial sustainability.

The European Commission’s recent ageing report reveals that Belgium is among the euro area nations expecting the most rapid escalation in pension spending in the forthcoming decades. Factors contributing to this include a lower average retirement age, a comparatively lower employment rate, and relatively higher average pensions.

The Study Committee on Ageing’s 2023 Annual Report projects that public spending on pensions will constitute 11.5% of GDP in 2023, with a forecasted increase to around 13.5% of GDP by 2050.

The European Commission’s Ageing Report (2021) further indicates that Belgium is projected to surpass neighboring countries and other high-debt nations in pension spending by 2070. Notably, this discrepancy is not solely attributed to a more pronounced aging population in Belgium. Instead, it results from a higher ratio of average pension to average wage and an earlier exit from the labor market compared to selected reference countries.

The article highlights policy options to address the rising costs associated with aging, emphasizing the necessity of curbing the projected increase in pension spending relative to GDP to manage the country’s public finances. Technical simulations suggest that a substantial reduction in the pensions-to-GDP ratio is achievable through a combination of policy measures. Increasing the employment rate of older individuals is identified as a welfare-enhancing option, simultaneously reducing pension spending, boosting GDP, and mitigating the risk of poverty. Policies fostering GDP growth, whether through increased employment or productivity, are seen as advantageous in reducing both the pensions-to-GDP ratio and the general government expenditure ratio. However, the effectiveness of productivity-driven reductions depends on the extent to which pensions for current retirees are increased. The report also suggests that any decrease in the average pension should preferably target the highest pensions to avoid exacerbating the risk of poverty.

In assessing the social sustainability of Belgium’s pension system, the analysis indicates that higher pension spending per pensioner compared to neighboring countries doesn’t necessarily correlate with a lower risk of poverty among the elderly. This multifaceted examination offers valuable insights into the complex landscape of pension sustainability in Belgium, emphasizing the need for nuanced policy responses.