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To promote transparency and provide information, the Federal Planning Bureau regularly publishes the methods and results of its works. The publications are organised in different series, such as Outlooks, Working Papers and Planning Papers. Some reports can be consulted here, along with the Short Term Update newsletters that were published until 2015. You can search our publications by theme, publication type, author and year.

Tax expenditures for second pillar pensions in Belgium - An analysis of the size of public subsidies for employees and the self-employed [WP 03-21]

The debate on the affordability of pensions is mostly limited to legal pensions while thus far, the affordability of supplementary pensions has hardly received any attention. Nevertheless, an increase in these pensions also affects public finances considering the lower government revenues that result from the various tax incentives used to promote supplementary pension saving. In this report we calculate the total impact of tax incentives for second pillar pensions on Belgian public finances. 

This version replaces the version published on 11 May 2021. The new version corrects the calculation of the tax revenues from (fictitious) second pillar interests and takes into account deposits for the supplementary pension for self-employed company managers declared at the pension plan level.

For years now, the use of supplementary pensions has been promoted in Belgium by all sorts of tax benefits (including advantageous social security taxes). A supplementary pension contribution is taxed less than the same amount paid out as professional income, which is then invested in a standard savings product. Also, the interests earned on the accumulated reserves are tax exempt while those generated by a standard savings product are taxed. Those who set aside part of their net salary for old age will therefore build up fewer reserves than those who do so by making use of a supplementary pension scheme. At retirement, the withdrawal of a supplementary pension is taxed, while the withdrawal of saved money is tax-free. Nonetheless, this tax upon withdrawal only partly compensates for the preferential tax treatment of supplementary pensions during the contribution and accrual phase.

Granting tax benefits for supplementary pension accrual leads to reduced government revenues. Because these revenues foregone are comparable to additional expenditures, they are often referred to as tax expenditures. Until now, not much was known about the size of tax expenditures for Belgian second pillar pensions. Hence, at the request of the policy unit of the Minister for Pensions, this working paper provides a first complete overview of the budgetary cost for second pillar pensions. Tax expenditures for the third pension pillar are not calculated. 

If second pillar pensions were taxed according to the standard tax system or benchmark, and this had no impact on the total amount contributed, the government would have received some 3,50 billion euros additional tax revenues in 2018: 2 billion euros from employee pensions and 1,50 billion euros from pensions for the self-employed. However, if the discontinuation of tax benefits affects the behaviour of employers in such a way that they would compensate the higher tax liability by contributing a lower amount for their employees (so that their total wage costs remain the same), then the amount of tax expenditures for supplementary employee pensions would drop from 2 to 1,47 billion euros. Depending on the measurement method used, the total tax expenditures for second pension pillar pensions are therefore estimated at 3,50 or 2,97 billion euros in 2018.

The tax expenditure estimations are not set in stone but are instead influenced by methodological choices and hypotheses that result from data issues. Future research can therefore refine and extend this study in four areas. First, the cash flow approach that was used in this study, should be complemented by the present value approach. Second, further research on the size of tax expenditures for supplementary pensions should also include third pillar expenditures. Future research should, furthermore, rely on specifically requested data for the research to be less dependent on data hypotheses. Finally, the macro calculations in this report should be supplemented by calculations using microdata. We know that supplementary pensions are very unevenly distributed. The question is whether and to what extent this translates into inequality in the tax benefits granted.

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, Joy Schols (CeSO, KU Leuven) (A)
 
A : Author, C : Contributor

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Planning & Working Papers

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