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Pension financing and individual retirement account

Arno Baurin () and Jean Hindriks ()

No 2020002, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: In this article, we analyze the Belgium pension financing in retrospect for the period 1995-2017 and then we provide a prospective analysis based on the demographic and economic projections of the Federal Plan Bureau. In the retrospective part, we point out the growing importance of alternative financing relative to the social security contributions. The decomposition of the public pension growth over the last decade between the average pension and the number of retirees shows that three quarters of the growth is due to the increase of the average pension. In the prospective part, we simulate the contributions and pension benefits required to balance the budget, based on different rules: Defined Contribution, Defined Benefit and the Musgrave rule (keeping constant the ratio of pension benefit to wage net of contributions). We then simulate pension adjustment via the "individual retirement account" (IRA) as proposed in Devolder (2019) and Devolder & Hindriks 2019). Under the IRA, the adjustment variables are the accrual rate (which determines the new pension claims) and the indexation rate (which determines the past pension claims). Combining those adjustment variables, our simulations show that it is possible to protect past pension claims and ensure budget balance on a yearly basis. We propose a rule of adjustment so as to equate, year by year, the replacement rate across retirees of different ages.

Keywords: social security; pension; retirement; ageing (search for similar items in EconPapers)
JEL-codes: H55 J11 J14 J26 (search for similar items in EconPapers)
Date: 2020-01-09
New Economics Papers: this item is included in nep-age, nep-cmp, nep-dem and nep-pbe
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