#2022-004 The old-age pension household replacement rate in Belgium
Alessio J. G. Brown & Anne-Lore Fraikin
The objective of the paper is to examine the retirement behaviour of
Belgian workers in one-earner households who are automatically granted a
more generous old-age pension benefits replacement rate, called the
household replacement rate. Following a recommendation of the Belgian
Pension Reform Committee, this policy is to be suppressed for new
pensioners, except for those receiving the minimum pension. We provide
an ex-ante impact evaluation of such reform on both pension
sustainability and adequacy measures. Specifically, we test whether the
household replacement rate entails a work (dis)incentive mechanism
promoting (harming) pension sustainability and furthermore, we analyse
the role of the household replacement rate in old-age poverty and
inequality measures. To do so, we use the survey dataset SHARE and a
discrete time logistic duration model to study the link between
retirement and financial retirement incentives created by the social
security system. We find that the household replacement rate generates
slightly higher retirement incentives through an income effect and we
find that the household replacement rate plays an important role in
decreasing the elderly poverty rate. Since households with asymmetrical
working arrangements are often at the lowest part of the equivalized
income distribution, the substantial effect of the household replacement
rate on poverty measures is a motive to use such mechanism as a poverty
alleviation tool. Nevertheless, we advocate that income redistribution
measures should not be tied to a specific household composition and
policies such as pensionable earning minima, minimum pension benefits
and the inclusion of replacement income periods in the pension benefits
calculation effectively serve the income redistribution goal without
favouring a certain type of household over another. Overall, despite the
positive poverty and distributional aspects of this policy, our analysis
supports the reform proposal of removing the household replacement rate.
Keywords: retirement, pension policy, Belgium, impact assessment
JEL Classification: J22, H31, H55, J26
