STU 03-06 : Special Topic : Simulating the impact of the pension bonus on the financial implications of working longer [ Short Term Update 03-06 - 20/10/2006]

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HEADLINES BELGIAN ECONOMY - OCTOBER 2006

This year, the Belgian economy should register a GDP growth of 2.7%. In 2007, economic growth should slow down to 2.2%.

In line with the international economic situation, Belgian export growth should strengthen to 5.4% this year and decrease to 4.9% in 2007. The current account surplus should hardly change. In 2006 this is due to the sharp increase in oil prices, which leads to a deterioration in the terms of trade, whereas in 2007 imports and exports should increase to the same extent, while the terms of trade stabilise.

Domestic demand should grow at a slower pace as business investment growth weakens somewhat after last year’s substantial catching-up. This is partially compensated for by a strengthening of public expenditure and especially by private consumption. Private consumption growth should accelerate to 2.3% in 2006 and 2% in 2007 (from 1.1% in 2005), thanks to the increase in households’ real disposable income and (at least in 2006) a further drop in the household savings ratio. Domestic employment should increase by on average 41,000 units in 2006 and 45,600 units in 2007. As the number of jobs is growing faster than the labour force, the unemployment rate (large administrative definition) is expected to diminish from 14.3% in 2005 to 13.7% in 2007. Nevertheless, the harmonised Eurostat unemployment rate (based on labour force surveys) should still increase from 8.4% in 2005 to 8.6% in 2006, only to drop to 8.3% next year.

Headline inflation, as measured by the national index of consumer prices (NICP), should amount to 1.9% in 2006 and 2007 (after 2.8% in 2005). This year, the inflation picture is blurred by the introduction of a new NICP-basket based on the household budget survey of 2004. Measured by the deflator of private consumption, which is not affected by this technical factor, inflation should only drop to 2.4% in 2006 and ease further to 1.9% in 2007. The steady decline in inflation mainly results from the moderate wage cost increase, the appreciation of the euro and the stabilisation of oil prices expected in the course of 2007.

Special Topic : Simulating the impact of the pension bonus on the financial implications of working longer

In 2005, the federal government presented the ‘Generation Pact’, containing a number of measures designed to strengthen the financial sustainability of the Belgian system of social security in the light of demographic ageing. One of these measures, the introduction of a pension bonus, is designed to encourage older workers to postpone retirement. The effect of this bonus on the financial consequences of retirement is simulated for four fictitious older workers, and the results are discussed in the text below.
The pension bonus

A pension bonus would be introduced in the first-pillar old-age pension systems for private sector employees and for the self-employed, granting them an additional pension benefit of 2 euro per working day that they continue to work after reaching the age of 62. This bonus increases the retirement benefit in all years of retirement. So, if a worker decides at his or her 62 th birthday to continue to work for a full year, he or she will receive an extra pension benefit at retirement for all years of retirement from the age of 63 on. Note that the bonus is first added to the pension benefit of an individual, and the combined benefit is only then compared to the minimum pension benefit. The minimum benefit itself is not increased by the bonus. [More in the publication ...]

STU 3-06 was finalised on 6 october 2006