Shedding light on the hidden welfare state of private pensions: Examining the size and distributional effects of social tax expenditures for second pillar employee pensions in Belgium

In contemporary European welfare states, little attention is being paid to the ‘hidden welfare state’ of social tax expenditures (STEs) for private pensions. This lack of attention is surprising since the growing use of private pensions, like that of statutory pensions, has important implications for the public budget. The reason is that private pensions tend to benefit from reliefs in income taxes and social security contributions, which leads to government revenue losses. That we have little understanding of the size and social distribution of these STEs for private pensions is partially due to limitations of existing data. The available data typically overlook preferential social security contributions and/or do not cover all three phases (i.e. contributions, returns on investments and pension withdrawals) of private pension saving. To highlight the importance of conducting new empirical research on STEs, we examine Belgian second pillar pensions for employees (i.e. voluntary occupational pensions for employees) using newly available administrative data. This case study clearly demonstrates that more accurate measurements of STEs for private pensions are needed, not only to reveal these ‘hidden welfare states’, but also to improve cross-country comparisons of private pension expenditures and to properly include private pension expenditures in discussions on the financial sustainability of pensions.