High labor productivity has afforded Belgians the luxury of working shorter hours and retiring earlier than do most other Europeans while still enjoying a standard of living in line with the EU average. As a result, only 26 percent of Belgians aged 55 to 64 years still work. This sweet trade-off cannot last. Like most Western countries, Belgium faces a demographic squeeze as fewer workers contribute to GDP and to the government's coffers at a time when the burden of supplying older people with costly pensions and health care needs is growing. Persuading more Belgians to work longer and creating more jobs will be vital if the country is to support its aging population, a study shows.¹

Compared with the rest of the European Union, Belgium is particularly vulnerable because it already has one of the lowest employment rates—just 61 percent—and citizens who do have jobs work five days less each year than the EU average.²

The productivity of Belgian workers is 10 percent higher than that of their US counterparts and 20 percent better than the EU average, but productivity growth is waning (Exhibit 1) and won't be enough on its own to tackle the demographic challenge. We estimate that if Belgium's current trends in labor participation, total working time, and productivity continue, its economic growth could drop to 1.1 percent annually over the next quarter century. As a result, by 2030 the country could face a budget deficit of up to 6 percent of GDP and a debt-to-GDP ratio of almost 100 percent—reversing Belgium's efforts to bring down the debt, which reached a high of 148 percent of GDP in 1993.

For Belgium to maintain a balanced budget, reduce debt, and absorb higher social costs, the economy needs to grow by an average of 1.8 percent a year—faster than the 1.5 percent rate achieved since 1990. To meet this goal, we propose a program that would put 440,000 more people to work (thereby raising the employment rate to 70 percent), stop any further substantial decline in average working hours, and achieve sustained productivity growth of 1.75 percent a year (Exhibit 2).³

Creating so many new jobs while improving productivity won't be easy. Belgium's politicians, employers, union leaders, and ten million people must rally around a change program that promotes a favorable climate for economic growth. One of the most important reforms will be to reduce Belgium's high labor taxes,⁴ which discourage the creation of new jobs. Another will be to simplify regulations and speed up bureaucratic procedures that stifle entrepreneurship and investment. In 2002 excessive regulation cost Belgian companies about €9.1 billion—more than they paid in corporate taxes. The bureaucracy also creates time-consuming delays: it takes an average of 144 days to get approval for marketing a new drug, compared with 68 days in the Netherlands. Less and smarter regulation is one of the keys to boosting productivity in Belgium's services sector, where most new jobs will be created.

Increasing demand for labor isn't enough. Supply must be stimulated by reactivating the huge part of Belgium's working-age population that is unemployed or in early retirement. Of Belgians aged 55 to 64 years, only one in four is gainfully employed, compared with almost three out of four in Sweden (Exhibit 3). The situation is hard to justify, especially as this age group becomes a larger share of the population. Companies have restructured their pension schemes both to encourage early retirement and to maintain peace with the unions. The result is that for many employees, the effective pension age is 58 years, well below the legal pension age of 65.

We propose abolishing the various early-retirement schemes by gradually raising the effective minimum age for a pension to 65 years or by increasing the minimum number of work years needed to qualify for a pension. The government has started to adopt these guidelines for its own employees, and it is important that private-sector employers and unions quickly follow suit. To gain acceptance for this first step, however, it must be supported by complementary initiatives. A company's social contribution for workers older than 55 should be reduced each year until it eventually reaches zero. This adjustment would make it cheaper for companies to retain older employees, as would phasing out automatic age-based salary increases.

Moreover, all those older than 55 should receive help finding work, including part-time jobs, suited to their talents and needs. Last, the government needs to build awareness of the importance of this age group for the country's economy. One successful example was Finland's recent campaign, "Experience is a national asset," which encouraged companies to retain older people, not to push them into early retirement.