You can listen to the interview in Dutch above. Chances are that you don’t speak Dutch so we transcribed it into English below. Enjoy!
Mark Scholliers is an economist at the Free University of Brussels-VUB and an investment expert. He is also the author of several books on themes such as investing, economic history and the pension system in Belgium. I found out about him through his book “Het Grote Pensioenbedrog” (“The Great Pension Deception”). In this book he shows that our current pension system is actually not well prepared for the changes that the future will bring and that a true pension crisis is in fact imminent. And the consequences of this crisis will mainly be felt by our generation and those after us. So that’s why I’m pleased that Mark is with us today to tell us more about it.
I just gave you a brief intro. But tell me about yourself. How did you end up in the world of economics and how did you become interested in the Belgian pension system?
So, I’m a trained macroeconomist. All my life I was interested in investing and everything around it. And then, at the beginning of my professional life, I ended up in a situation where I had to supervise a starting pension fund. And we’re talking about 20 or 30 years ago. It was at that time that my interest in pension issues was actually created, because that was a pension fund, what is called the second pillar. And from then on it was just crescendo, this interest in the pension issue.
Almost every time I read the news I see references to the pension crisis. What exactly is the crisis and should we be worried about it?
Well, I think everyone should be worried about it.
The pension crisis is actually just a crisis of the financing of pensions. There is simply not enough money in Belgium to continue to pay the rising pension burden.
And at the same time, and this is of course very distressing, the statutory pensions in Belgium are among the lowest in the eurozone. So then you have a combination. And then you also see, for example, political parties honking around “we have to have a minimum pension of 1500 euros for a full career”. That’s quite right. But even now, pensions cannot be financed correctly. How should that be done if they are being increased? So that’s the full extent of the pension crisis. It’s a financing crisis, nothing more or nothing less.
Everyone seems to be aware of it. Yet it seems that not enough is being done to prevent the crisis. Why is that?
Well, first of all, it is of course a very annoying problem for a politician, if you have to deal with difficult questions. There’s no money left in the coffers, more and more people are becoming pensioners. Then they actually have to take very strict measures. And no politician, let alone the class of politicians as a whole, is eager to do anything in that direction. So the picture you see today is that we are all in a rowboat. I think that’s a nice picture actually. That rowing boat shows cracks and holes in several places. And with all kinds of tools they try to fill those holes. And then the boat floats again for several years. But that is no solution, something has to change structurally. And politicians today are not able to take that step. They are far too preoccupied with short-term thinking. That’s just the way it is. I think that’s inherent to the profession of politician. But anyway, we as a society are victims of that, of course.
So concretely: what could happen to someone like me or one of our listeners, so 25 or 30 years old. What could be the consequences for us by the time we retire?
As I wrote in the book, which I wrote together with professor-emeritus Jef Vuchelen, we give a kind of manual there.
And one of the first points is, if you look at the possible solutions to our current pension problem, that financing that goes wrong, that is to think thoroughly about how you are going to finance pensions in the future. And that is completely absent today. There are certain initiatives, such as the Commission on Pension Reform 2020-2040, but that is all what is called “a bit of a fringe rumble”. These are not fundamental solutions. So what someone of 25 has to do today is very concrete.
You can still hope for the statutory pension, in the sense that it will never completely disappear. But in Belgium, it is not the case that the statutory pension is enough to even approach the standard of living you will have reached when you are 65 or 67. So you are obliged to make use of the second pillar. That’s really all that has to do with extra pension provisions that are arranged by the company where you work. Or if you work on a self-employed basis, a VAPZ scheme or an IPT scheme (individual pension commitment). You should certainly do that if you can do that.
Then you have the third pillar. For most people, that’s just saving for retirement. Each year, if possible of course, save 980 euros (today) together. Of course, if you start at 25 and save until you retire, you’ll already have a large nest egg together when you retire.
And if there is some money left and you can do it (because not everyone can do it of course), you should be able to put 100 or 200 euros aside on top of it every month to invest. And that is something we would recommend from a macro-economic point of view. In equities, because in the long run that pays off the most in a way that does not run too much risk. But because you invest on such a long term, risk is not really a big problem.
So, to summarize, you actually have to participate in the four pillars. The last three, you can do something about that. The first one you have to undergo. But today, as a 25 year old, you have to be active everywhere to be sure that within x number of years you can maintain a normal life style. So that’s in a nutshell, because you can of course tell a lot more about it. But that’s the bottom line.
Read our answer to Jente’s question “How much will my pension be?” to learn more about the four pillars of the pension system!
You talk about the financing of the statutory pension, the first pillar, and that’s where the problem lies. I think you also explain it very well in the book. So that it’s actually because people think that if they save for their pension, they’re actually saving for themselves. But in fact, most of what you’re saving goes to the current pensioners. That’s the repartition system. Can you briefly explain what the repartition system is and why it won’t work anymore?
I think “pay-as-you-go”, another term for repartition system, is a word that better describes it. If you get your salary, part of it will be withheld from social security. Part of that deduction is used to pay pensions. And as you say, most people effectively think that this will end up in a personal piggy bank, where they can draw on it later to enjoy their pension. But in practice, that’s not the case at all. So “pay-as-you-go” means: on the one hand the money comes in, but in the same month the same money is spent on people who are already retired.
We’re actually hitting the nerve here where it really hurts our funding system. And why is that? Because such a system is actually based on the idea of a pyramid. In this pyramid, the pensioners are at the top and the workers are at the bottom. There are more working people than retired people and then a repartition or pay-as-you-go system can work without any problem. There are always enough workers to provide pensioners with a good pension. This system, which in Belgium, but also in Germany, Spain and France, is partly also found in the Netherlands, originated after the Second World War. And back then everything was very positive. There was much more economic growth than today, the population increased… And that pyramid was also there, so at that time such a repartition or pay-as-you-go system was no problem at all.
What have we noticed in the last twenty years? You’ve got the baby boomers, so those are the people born between about 1950 and 1965. Those people are all starting to retire. And instead of having a pyramid, we’re getting opposite. A pyramid that’s upside down. That’s a little black-and-white, but that’s the bottom line. So every year you have fewer people who can contribute under the pay-as-you-go system, to the pensions of those who are already retired. So the gaps are getting bigger and bigger.
So what’s the government doing today? Originally, the pension contributions of the workers were sufficient to pay the pensions of those who are already retired. Over time, as early as the 1980s, 1990s, that money was not there. So money was taken from the national budget (the federal budget) to fill the gaps. And at the moment, government grants, in the form of VAT reductions and so on, will account for about half of the total cost of pensions. So that system is breaking on all sides.
And so it is the way those pensions are financed that is at the root of the problems we have today. Fewer and fewer working people have to pay the pensions for more and more retired people.
Is this a problem that is going to get bigger and bigger in the future?
Well, that depends on the demographics. If you look, for example, at how births have evolved since the Second World War to the present day, you can see that the supply of new people who will work in the system in the future and contribute to pay pensioners is insufficient. In Belgium, we are hardly at a replacement rate in terms of the number of births. There is a positive balance thanks to immigration. But that is also insufficient to straighten out the system within the next 10 or 20 years.
Sure, what happens in 50 or 100 years, who are we to say about that? You don’t know. But within a foreseeable future, you can make a calculation based on, for example, demographics that exist today. You know how many children were born last year and you know how many are dying. You then know how many extra employees and self-employed that will give within 18 years, within 20 years, and so on. So you can pretty well calculate how that pyramid I mentioned earlier will behave. And it doesn’t look so good.
So as a young person: you’re actually obliged to think about your own future when it comes to pensions, because unfortunately it won’t come from the government.
The European Union is working on the Pan-European Pension Product. In this way they are trying to harmonise the supply of pension products in European countries. Do you think such initiatives can help solve the crisis?
I think that’s a good initiative in itself. If you can get something like that extra and then go European, why not? They’ve been working on it for about three years now. That seems to be progressing a bit, but it’s not really concrete yet. I think that in practice, depending on how the final structure is structured, it would be an additional possibility to do something extra for your pension in the second or third pillar. An additional advantage is, for example, if you later moved to the south, to Greece or to Spain, that you might be able to use the money from that pension there without much difficulty.
But I have the feeling that this is still quite far from us because, despite all the honking and bleating, there is hardly any fiscal harmonisation within the European Union at the moment. Yes, for anti-money laundering, but that’s easy actually. But think, for example, of after-tax income. Take the countries in the Benelux, which differ enormously. Take Germany and France. Then you get a cacophony of rules. So I think that for the European Pension Initiative to be really successful, you should actually be able to use tax harmonisation as a basis. Unfortunately, that’s not the case today either. By the way, I think Europe is drifting more apart in that respect than it is coming together because of the different views on that sort of thing. Those differences are very big.
It’s a bit like here in Belgium, between north and south. In Belgium you have the same split as between Northern and Southern Europe. Northern Europe chooses more the map of self-reliance, while Southern Europe says “we government will take care of it”. That’s like today’s PS in Belgium, for example: “pension of fifteen hundred euros? No problem, we’ll take care of that”. And pensions, like everything else economics is, are not an exact science but a social science. You often have to make decisions that are socially coloured, that have to do with your own vision of society, how you would like it to function. And pensions don’t escape that.
It sounds like a distant future, unfortunately. You’ve already said a few words about it, but perhaps you can summarise, so with the knowledge and insight you have now, what advice would you give a 25-year-old Mark so that he could eventually enjoy a good pension and be assured of one later on?
Quite concretely, and I’m very sorry to have to say that, but I have limited confidence in the ability of politicians to put the statutory pension scheme on the right track.
It’s still there, and let’s hope it exists for a long time to come. But don’t count on it.
So what do you do then? What do you have to do? Take the initiative yourself to the extent that you can. Because if you just graduated, you have your first job, you don’t have much left over every month, you might get married and stuff. But if you can do it at all I would start to put aside, if only 50 euros a month, in a safe long term investment in stocks that you don’t have to look at. But make sure that 50 euros are deposited into that fund every month. By saving again each month, you also smooth out the risks of the stock markets. In our book we have given a few examples of this. And you’ll be surprised at the returns that such a thing can produce if you start early enough.
In a manner of speaking, I think it should almost become compulsory for parents who have a child to spend some of the child’s money, let’s say 50 euros, from the first month on forming a future pension.
This is, I repeat, a vision. This is my vision. So it’s colored, in the sense that I think you should take some responsibility yourself. And that’s in contrast to a lot of other people who say, with all due respect for that vision, “we government, we will find solutions for that. You shouldn’t worry about that.” So that’s an important clarification I have to make.
Of course, we have seen with the Greek crisis that governments cannot always keep promises.
That’s an understatement. Also in Belgium, by the way. Because that’s something one sweeps under the carpet rather easily. But raising the retirement age from 65 to 67 in the long run is a breach of contract if you look at it from a purely legal point of view. Someone who is working hard is counting, or was counting, on a retirement at the age of 65. And suddenly that turns into 67. That was imposed unilaterally by a government that actually raises its finger against the man in the street and says “look, we don’t have any money, it’s unfortunate, but that’s the way it is”. I don’t think that’s reasonable. Which is not to say that raising the retirement age is not justified, because as a human being you live much longer now than for example 40 years ago. So it’s not abnormal to raise the retirement age. But I would have thought it much more correct to only do it for people who are at the beginning of their careers and in that way can actually take it into account from the beginning.
There are people who are 50 today and always thought, until a few years ago, “I can retire at 65”. Now it’s 67, maybe later it will be 70, you don’t know. That’s not serious. A government has to radiate confidence. You have to be able to trust it. And that’s something that’s not the case today, especially in Belgium. It may not be a positive note to end on, but I think it should be said because government is by definition something that structures society and keeps it together. And I don’t think it’s possible for the government to actually make people sit on soft ground that way.
I think that’s also the role of government for many, as something that will always take care of us. And finally, where can our listeners find out more about you?
Of course, the book “Het Grote Pensioenbedrog” (“The Great Pension Deception”) is still available from the publisher. Then we also have a website at www.precisis.be that focuses on the pension problems. There you will find a number of articles, including contributions by Jef Vuchelen, about the problems. And if you have very specific questions, you can also reach me by email. But I’m not a pension advisor in a personal capacity, of course.
The whole problem is also very important for me personally, because we had some expectations when we presented our book. By the way, it happened in the Belgian Senate, initiated by the then President of the Senate. Well, what do you actually want to achieve professionally as a macroeconomist? That at some point people take some account of the things you say and write. That hasn’t happened at all. On the contrary, people rather try to conceal the things we said because, I repeat, politicians are not inclined to do things that might harm or will harm their own popularity. It is much more enjoyable, as happens today, to say “we are going to increase all pensions”.
Thank you for the interview!
Thank you for thinking of me. It’s been a pleasure.