Social Security, Implicit Debt And Inequality : Learning From The Belgian Experience

Public pension schemes based on the pay-as-you-go principle are unfunded, by construction. In other words, present and future pensioners rely on the promises made by Social Security institutions for the payment of their pensions. This commitment, basically described by a series of rules defining eligibility conditions, benefits computation and pension contributions, is not reported in national account. Neither as part of the public debt to which in fact they belong. In this paper, we estimate the burden of this implicit debt for Belgium using a representative sample with detailed administrative micro-data from pension record files. Moreover, for present and future pensioners the actuarial expected value of pensions is part of their personal wealth, aside from other assets, but is intangible. Feldstein (1974) introduced the concept of social security wealth (SSW) to describe this component of personal wealth, and showed how individuals’ behavior, mainly labor supply (retirement) and consumption (wealth accumulation), is potentially affected by pension entitlements. The way SSW is distributed among individuals in the Belgian population is another key issue addressed in this paper.