Company Financing and the Sustainability

of our Social Security System

Koen Schoors

Quo vadis, België? p.10

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Persons of working age (15-64) per elderly (>65)

Pension age, life expectancy and working hours per year

13

Bron: ADSEI (EAK). Grafiek: HRW

According to sex According to level of education

Employment of age class 15-64 in Belgium

Bronnen: ADSEI, EC (EAK). Grafiek: HRW

Employment of age class 15-64 in BelgiumCompared to EU According to regions

Nothing left on the savings account

Structural deficit 2012

How to pay for ageing? The Belgian case

Savings budget2011

Savings budget 2012

Income taxation Taxes on goods and services

Cost of ageing

How to pay for ageing? The Belgian case

Cost of ageing

Structural deficit 2012

Expenses of regions, local governments (a.o.education 6%)

Expenses of federal

government

Expenses of regions, local governments (a.o.education 6%)

Expenses of social security system

Expenses other than social security

Social security expenses

Interest expenses

Unpleasant fiscal arithmetic

• Instead of savings of 1200 billion (320% GDP), our government has a debt of 375 billion (100% GDP)

How to save the social security system?

1. Measures that reduce the cost of ageing (care, health, pensions)

2. Measures that stimulate economic growth – More growth implies more fiscal revenues in euro terms that

can be used to finance social security expenditure

3. Fiscal austerity and government efficiency to absorb the residual cost of ageing We will have to do all of these to turn the corner

Smart austerity

• Less government consumption is the most sustainable and effective way to restore fiscal health– Higher taxation is very effective in the short run, but there

are strong negative side effects in the longer run

– Government efficiency will be of the essence, especially in social security itself and in regional and local governments

• Cutting government investment is as tempting as it is stupid!

– More (wise) government investment usually to additional growth and positive fiscal muliplier effects

• We can create extra room if debt is cut fast (no procrastination)

• But cutting too savagely is equally unwise (recession/deflation)

Tax reform is needed I

• Participation in the labour market is especially low in Belgium

– This is related to the way we tax labour (payroll social taxes lead to a vicious circle)

Taxation for average worker Participation rate

Lower payroll taxes lead to more employment

• 1% more employment = cost of aging down with 0,75%

– Double effect on the budget: lower expenses and higher revenues

• Lower payroll taxes (social taxes) are needed especially for older and low-skilled workers– Lower taxes on workers : supply effect

– Lower taxes on employers: demand effect (this one is larger)

• There is no alternative: we also need to find new revenues– Environmental taxes and taxation of capital revenues will

show up on the radar, but these categories are rather small

– Optimal combination: lower social taxes on employers, compensated by higher value added taxes

Tax shift from labour to consumption

Price average good price export good price labour intensive good

Tax reform is needed II

• Taxation of firms is unfairly distributed, SME’s don’t get a fair deal

– Notional interest deduction– Transfer prices– Internal bank and internal capital markets– Thin cap rule– Complexity of the tax system

• Would we not be better of with a system– That is less complex– Makes everyone pay a moderate amount

• Why are bank deposits subsidised and investments in more risky capital discouraged?

Pensions

• Here is one of the most effective channels to reduce the cost of ageing

• Working longer will be necessary

– Gradual introduction

– Career = 45 years

– Pension <45 jaar is untenable for the social security system

– Raising the early pension age to 62: cost of ageing falls with 0,4%

Pensions: the problem of old age unemployment • Participation in Belgium is absurdly low in 55-64 age class

Population between 40 and 64 according to their socio-economic position

Legal pension age will have to rise

• Introduced in 1889 by Otto von Bismarck for people >70; life expectancy was then 45 years

• In Belgium introduced in 1925 for people >65; life expectancy was then 58 years, now more than 80 years

• Increase the pension age in function of life expectancy

– Pension age in Italy will be 70 by 2060, in Denmark 72,5

Problem of rigidities in the system

AGE AND WAGE

Bridge jobs instead of bridge pensions

• Current system of bridge pensions:– Elderly (>50) are dumped with reorganization– Receive unemployment benefits– Firm bridges the gap with pension till pension age– Subsidy for inactivity

• Proposal of bridge jobs– Elderly receive unemployment benefit– The firm pays the bridging payment to a fund– Fund pays wage subsidy in case of reemployment– Subsidy for activity

Business process re-engineering with silver sourcing

• Business processes think of older workers as waste to be disposed

• Very inefficient business procedures that throw away valuable competences

• Redesign business processes with room for silver skills, competences and jobs

• Ask the silver competences for inspiration and ideas to achieve this

Career re-engineering for life-work balance

• Now people often run one long rat race till they are consumed by the job

• Too little room for a break, reorientation, inspiration and new directions

• If we work longer we may need sabbatical breaks as standard part of a career

• If we work longer, second and third careers will become something desirable.

Sharing of silver skills among firms

• Silver skills and competences may be redundant in one organization, but highly wanted in another

• Why make the link through the labor market via lay-off, reemployment and all the negative effects?

• Create a platform for silver competences where organizations offer and demand competences

• Government organizations could show the way here by linking across administrations

• Think of it as a for silver skill

Connecting silver skills and nonprofit

• Firms donate to nonprofit for corporate social responsibility purposes

• But they lay off their silver skills

• A better solution would be to donate their silver competences instead of money

• Create a platform with demand for skills from nonprofit and supply from other organizations

• Think of it as a silver

This is it folks