The 80% pension income rule: on the illusion of a decent pension and the cheating of our government
Employees and self-employed can save for their retirement in a group insurance fund or in an IPT / EIP. The contributions to this fund can be subtracted from the company (employer) profits. Our dear belgian government has put a limit on the contributions. They decided on “the 80 % rule”.
The 80 % rule
“the statutory pension (normal state pension) and the extra-statutory (extra-legal) pension must (together) not exceed 80% of the ‘normal’ gross remuneration of the last year. “
Now this sounds like a fair rule isn’t it? I work and receive 3500 € per month as a gross salary. Now I retire and I receive 3500 x 0.80 = 2800 € gross retirement income per month. Most people don’t have children at their expense by then, and most have their house paid off (if they have their own property, otherwise there is rent of course…). I think I can live on 80 % of my working salary at age 65.
Bag of money –> income??
The question I always had was: how does a lump sum, saved in a group insurance, translate to a monthly income? How does, for example, 177 k € saved in the group insurance fund, guarantee me 2800 € pension for the rest of my life? Each time I asked this to a bank employee (selling me the IPT) or an insurance specialist (trying to sell me the IPT), I get the ‘that is much too complicated to explain, we have specialists at the bank who will calculate that for you’ answer.
on MySavings.be they start with the promising title:
“80%-regel: hoe berekent u de bezoldiging correct?“
after which they … do not explain at all how the rule is calculated, but promise a simulator and link to selling their group insurance!
So I started to find out myself.
Let’s start with a simple case. I am allowed to put 177 570 € in my fund. I have to pay 10 % taxes + city taxes (7.7 % on 10 %) + RIZIV (3.5 %) + solidarity premium (2 %) = total 16.7 % on that, receiving 147 916 €.
My (working) salary is 3500 gross, my state pension / statutary pension is 1228 per month. According to the 80 % rule I would expect a pension of 3500 x 0.80 = 2800 € /month. So I need an additional 2800 – 1228 = 1572 per month out of this group insurance fund during my retirement. We can easily calculate how long the additional 1572 will last: 147 916 / 1 572 = 94 months = 7.8 years. Which means that after 7.8 years of my retirement, the IPT is gone, and I will fall back on my state pension of 1228 /month.
Wait a minute, WHAT? So I retire at 65, and at age 73 I will have to live on 35 % of my working income, not 80%? Is that why I worked and saved the maximal amount until age 65, to fall into poverty at age 73? Where has this 80 % promise of our government gone?
The answer is: YES, I fall back into poverty. I worked till 65, saved the max amount, and fall back on my state pension of 1228 /month at age 73. The 80 % rule is pure bullshit, it is sand in the eyes of the employees and self employed who think that they are guaranteed 80 % of their income after retirement.
The formula for the max savings amount
EWP < ((((80 % × S) – WP) × n/L – EWP) × c ) / 1.2
That’s it, folks. The horrible formula for which you are too dumb and need a bank expert. Let’s use my example:
- EWP = Extra Wettelijk Pensioen = the max amount I am allowed to save. The result of this formula.
- S = my salary. Annual, and should be the latest regular salary. So I use 3500 x 12 = 42 k.
- WP = (Annual) Wettelijk /legal pension. For self-employed: take your salary / 4. For employees: take your salary / 2. If lower than the minimum pension (1551 / month for employees, 1228 for self employed), take that. So I will take the minimum for self-employed, 1228 / month = 14743 / year.
- n/L = number of years worked (and paid social security) / total carreer (40 years). I take 40/40 = 1 for this.
- EWP = other extra legal pensions (VAPZ etc). I take zero for this, to calculate the total max savings in my IPT
- c = the out of the blue ‘Coefficient’. The tricky part. This is where the magic happens: it converts in a mysterious way the annual additional pension into a lump sum which you are allowed to save. This is a coefficient determined by:
- using your marital status (if your spouse is assumed to receive contributions if you die)
- if the interests (if any !) are indexed or not
- the age you start with your retirement
The coefficient is between 11.3 and 16,1 at age 65. The 11,3 is for not-spouse-carry over and non-indexed interests which is my case. Simply stated, this coefficient says how many years you can use the lump sum before it is gone up in smoke.
So the formula for the max amount in my IPT becomes for my case:
Max amount = ((((80 % × 42000) – 14743) × 40/40 – 0) × 11.3) / 1.2
Max amount = 177 570 €
But I still have to pay taxes (16,7 %)! So I receive 0.833 x 177 570 = 147 916 € in total. The number of years is really 147 916 / 1572 = 7.8 years in my case.
For other cases (married, employees, ..) the coeficient could be higher. But even the highest value (0.833 x 16.1 / 1.2 = 11.2) will only give you an additional pension income until age 76, after which this lucky bastard is also assumed to drop dead.
The marvellous thinking behind the rule
There are lots of reasons for this short time to enjoy your old age:
- the 80 % rule assumes that you drop dead at the average life expectancy age (80 for men); and that nobody needs an additional retirement income from a group insurance or IPT after they dropped dead at 80. Somehow, this assumption is not present for state employees (“civil servants”): they are not supposed to drop dead at 80. If they live until 110, they receive a high state pension (state pension, without any contributions or savings!) until 110
- the 80 % rule assumes that there will be an additional profit contribution of 20 % on the capital (which you do not receive in reality)
- even worse: because interest rates are lower than inflation, you will receive even less in purchase power than this miserable 8 years of added income
- the calculation is always given without all the taxes (which you do have to pay in reality)
Let’s dig a little bit deeper into some of these assumptions.
Assumed profit contribution
The max allowed amount to save is your calculated amount (= monthly addition to reach the 80 %, but only until age 80), then DIVIDED BY 1.20. They assume that you receive 20 % on ‘profit contributions’ on each euro saved. I checked my ‘profit contribution’ for last year (2018):
- there were NO profit contributions for 2018
- there was a total of 1.9 % profit contributions on the total amounts saved during 2009-2013
So instead of a growth of 20 % on my savings, it will be 2 %, and it very likely will not grow any more during the future years until my retirement.
The thing that makes me angry is that our government does not live on another planet; they live in Belgium and they know very well that we are in a very low-almost zero interest rate environment, with zero / almost zero profit contributions which is true for today and likely for the distant future. So dividing the max amount by 20 % is just knowingly and fully aware subtracting 20 % from the savings of retirees, based on a well-known false assumption.
Make sure to drop dead at 80
Remember the magic coefficient? It contains the number of years you are supposed to survive in retirement. A really lasting savings amount would have to take into account that you can become any age, therefore assuming that the real growth of that amount after inflation is providing your additional retirement income (without eating the capital). That would require a much higher coeficient, such as 30 (assuming that a fund would e.g. give a long-term growth of 6 % – 3 % inflation, so 1 / 0.03 = 30). Or think about the famous ‘4 %’ rule, used to calculate the size of your ‘retire-early’ fund. That implies a factor of 25 (= 1/ 0.04). The coefficient allows you to ‘enjoy’ the 80 % rule during 8 to 11 years after 65, after which you cannot pay the rent or retirement home / service flat / .. any more.
Interest lower than inflation
The funds which are usually used for an IPT are “TAK21” because the banks assume that a retirement savings should be ‘safe’ and not gambled in the stock market. Which means that they typically give you a 0.70 % interest. In a time where inflation is 2.78%. So my savings will be worth 51 % less by the time I retire in 15 years from today. That is not even taken into account in my calculations. Unfortunately, the world will take inflation into account. All services, health expenses, travelling, … will be 51 % more expensive. To keep 80 % of my last salary in real purchase power, I will have 7.8 years / 1.51 = 5 years to go after 65. Otherwise stated: poverty waits at age 70.
A detailed study here, but it is not including today’s tax implications and the 1.20 factor.