The 'generation pact' policy
Considering the expected demographic developments in Belgium, the level of employment in is too low, as a result of which the social security scheme being based on repartition (active people finance the social security system on behalf of inactive people) will come under pressure.
In order to safeguard the Belgian social security system the Belgian government has created the so-called ‘Generation Pact’, a policy stimulating the employment of woman, older workers, semi- and unskilled workers, immigrants, disabled persons and young people.
On 30 December 2005, the Act of 23 December 2005 with respect to the generation pact was published in the Official Gazette. Though many measures are not yet finalised and so have not yet come into force, since many of the decrees executing the act are still in draft form.
The generation pact has not changed the legal retirement age of 65 years in the private sector, though for woman the legal retirement age is 64 for the period between 1 January 2006 through 31 December 2008, and 65 as from 1 January 2009. A great deal of the generation pact focuses on reducing the possibilities of early retirement and stimulating people to work until the legal retirement age and beyond.
Because many employees consider early retirement schemes, such as pension bridging (see below) as achievements of the Belgian welfare state, the generation pact gave rise to much concern and worry. This article comments on some of the income tax and social security measures motivating employees in the private sector to work until retirement age, as the measures are expected to become applicable based on the draft decrees executing the act of 23 December 2005.
Conventional pension bridging is an early employment exit system based on a collective labour agreement, in principle as from the age of 60, but quite often as from the age of 58 and even earlier, for example, in the event of company restructuring. It allows certain older employees to receive in the event of termination of employment by the employer for other reason than cause, an additional compensation from the former employer on top of their unemployment benefit.
The unemployment benefit is calculated at 60% of a the gross monthly salary up to a ceiling. The entitlement to conventional pension bridging is subject to conditions relating to age and length of service.
In order to discourage the use of the conventional pension bridging,, the age and length of service regulations are tightened, and the special employer social taxes are changed from lump sum contributions to contributions calculated as a percentage of the additional compensation. This percentage decreases with the age of the employee, so the younger the employee the higher the percentage.
Furthermore the generation pact includes incentives for the employee benefiting from a conventional pension bridging to seek employment with another employer or to start a self-employed activity. Firstly, in the event that the beneficiary finds a new position with another employer or starts a self-employed activity, the additional compensation will no longer be subject to the employer social taxes during the period(s) of activity, provided the former employer is obliged to continue the payment of the additional compensation in the event that the individual would find a new position with another employer or starts a self-employed activity.
Moreover, provided the former employer is obliged to continue the payment of the additional compensation in the event that the individual would find a new position with another employer or starts a self-employed activity, the additional compensation will be considered as replacement income for income tax purposes, as a result of which the beneficiary is entitled to claim a reduction on his income tax liability.
The salary from the new employer or the income from the new self-employed activity will be excluded from the basis to calculate the tax reduction to prevent that the reduction is neutralised by this new income. If there is no obligation for the employer to continue the payment of the additional compensation during periods of activity, it will be considered as ordinary salary (no tax reduction) for income tax purposes.
All employment exit schemes whereby the employment of ‘older’ employees not qualifying for a conventional bridging pension is terminated by the employer (for reasons other than for cause) and whereby the employer pays an additional compensation on top of the unemployment income of the terminated employee, are called “Canada Dry” schemes. Canada Dry schemes look like conventional pension bridging schemes (unemployment income plus additional compensation), but they are different (Canada Dry looks like champagne, but it is not).
Whereas the unemployment income under a conventional bridging system is calculated at 60% of a gross salary up to a ceiling, the amount of the unemployment income under a Canada Dry-scheme is calculated based on the length of service and family status. Moreover in practise the amount of the additional compensation under Canada Dry-schemes is different from the amount of the additional compensation under a conventional bridging scheme.
In order to meet the objectives (that is to discourage the use of early employment exit schemes and motivate employees to work longer and to seek another employment or professional activity in the event of termination at ‘older’ age), the additional compensation under a Canada Dry-scheme will be subject to special social taxes - which were not due until today, and will in principle no longer be considered as replacement income for income tax purposes, for which the beneficiary can claim a reduction on his income tax liability, but as ordinary salary (no tax reduction).
As for the additional compensation under conventional bridging pension schemes, the additional compensation under a Canada Dry-scheme will however still be considered as replacement income for income tax purposes provided the former employer is obliged to continue the payment of the additional compensation in the event that the individual would find a new position with another employer or starts a self-employed activity. The salary from the new employer or the income from the new self-employed activity will be excluded from the basis to calculate the tax reduction to prevent that the reduction is neutralized by this new income.
Moreover, in the event that the beneficiary finds a new position with another employer or starts a self-employed activity, the additional compensation will no longer be subject to the special social taxes during the period(s) of activity provided the former employer is obliged to continue the payment of the additional compensation in the event that the individual would find a new position with another employer or starts a self-employed activity.
In Belgium the majority of employees opt for their company pension entitlements to be paid to them as a lump sum amount at exit rather than a monthly pension because a tax favoured treatment applies to lump sums. In Belgium pension lump sums received from a company pension scheme are in principle taxed for income tax purposes at a separate rate of 16.5% or 10% (both rates are increased by communal taxes) respectively to the extent that the lump sums have been built up by employer or employee contributions, whereas monthly pensions are taxed at standard progressive income tax rates.
In order to motivate people to work longer, the generation pact has reduced the above-mentioned tax rate of 16.5% to 10% provided the pension lump sum is paid no earlier than at the legal retirement age (65), the individual has effectively worked until the legal retirement age and no advances on the pension lump sum have been taken, nor has the pension lump sum been used as a guarantee for mortgage loan.
The generation pact includes many other measures to motivate people to work longer, such as the following non-exhaustive list shows:
q A different salary ceiling will be applied for the computation of the legal pension for periods of activity and periods of non-activity. The ceiling for periods of activity will continue to be indexed and revaluated, the ceiling is frozen for periods of full-time unemployment, full-time bridging pension, full-time career interruption or full-time time-credit;
q The amount of the legal pension will be increased by a bonus for those employees who have reached the age of 62 years or have a length of service of 44 calendar years or more, provided they continue their professional activity;
q Unemployed people of more than 50 years old who find new employment will automatically be entitled to four weeks’ “holidays for seniors”, including during the first year during which a new employment has been found (in principle the entitlement to holidays is calculated based on the number of days of employment during the preceding year).
By introducing a number of positive motivators stimulating the employment of woman, semi- and unskilled workers, immigrants, disabled persons, young people and older employees on the one hand, and by tightening the regulations regarding early employment exit schemes on the other hand, the Belgian government has taken the first step to safeguard the Belgian social security system taking into consideration the expected demographic development.
With respect to the employment of older employees, we can conclude from the above-mentioned comments that the measures should result - at least this is what the government hopes - in that the factual retirement age will move closer to the legal retirement age of 65 in the coming years.
Bart Van Dyck and Johan Heymans are with Watson Wyatt in Brussels