On January 1, 1.3 million workers will receive more than 11 percent extra wages through annual indexation. This applies to a large part of the white-collar workers. But how does our almost unique index system actually work? And who benefits and who does not? “We wouldn’t end up in the Far West without it.”
More wage growth in two years than in the previous twelve years
In Belgium, the system of automatic wage indexation has been in force for decades. This means that our wages are fixed to the consumer price index and thus more or less follow the cost of living. If a basket of products becomes more expensive, our wages will also rise. That sounds simple, but behind that theory lies a complicated practice. Each sector belongs to a joint committee, a kind of sector association. At the beginning of last year there were 100 different joint committees and 64 joint subcommittees. They have each agreed on a separate scheme for indexation after consultation between employers and employees.
There is also a large group that is not housed in a joint committee, such as the civil servants. It is stipulated by law that they follow the so-called pivot index. This means that every time the index basket rises by at least 2 percent, there is also an increase in their wages. Historically, this meant that wages there increased once a year on average. But due to the exceptionally high inflation in 2020 and 2021, this has happened no less than eight times in just two years, an average of four times a year. By way of comparison: from 1990 to 2020, the central index was exceeded only 27 times in thirty years, on average less than once a year. In other words, our wages have been adjusted more often in the past two years than in the previous twelve years.
From monthly to annual adjustments
The rhythm of wage increases differs from sector to sector. The central index is followed for 60 percent of the employees, the wages are indexed annually for 30 percent and there are all kinds of intermediate forms for a small minority of 8 percent. This varies from a monthly (electricity and gas companies) and a bimonthly (banks) over a quarterly (upholstery and woodworking) and a four-monthly (notary clerks) to a half-yearly (cleaning companies) adjustment. For just under 2 percent of employees, no indexation is provided at all, such as for professional sportsmen.
The longer it takes for the index adjustment to take effect, the more it will be to the detriment of the employees involved. For example, white-collar workers with annual indexation have been experiencing a decline in their purchasing power since the beginning of 2022: prices have risen, but their wages will not be adjusted until January 2023. In addition, they will also receive only 11.13 percent on top of their January 2022 wages, while their fellow civil servants will receive an annualized 11.66 percent. After all, they each received 2 percent on the previously indexed wage. With a gross salary of 3,000 euros per month, this amounts to a net profit of 100 euros per year for civil servants and other employees with the central index.
Belgium is (almost) unique in the world
Only a handful of countries still apply automatic indexing, including Luxembourg and Malta. The system was still popular in the 1970s. Bart Van Craeynest, Voka’s chief economist, thinks we should ask ourselves whether it is still up to date. “If almost the whole world does it differently, you can still ask yourself questions. Look at countries around us, such as the Netherlands and Germany, where free negotiations exist. Not only between sectors, but also between companies within certain sectors, companies that do better can give more. Variation and flexibility makes much more economic sense.”
Mathias Somers of the progressive think tank Minerva points out that these negotiations are not necessarily that much freer in other countries. “In Germany, for example, the metal union determines a lot. If there is an agreement within that powerful sector, the others will soon follow. In this way you give certain sectors a lot of say and there is de facto a certain levelling.”
Pros: social peace and preservation of purchasing power
One of the main benefits of indexation is that the purchasing power of employees is maintained. And that in turn leads to more social peace. “On the one hand, you prevent employees from getting stressed about the level of their wages if prices suddenly rise,” says Somers. “And you avoid a lot of misery between employers and employees, who would otherwise be ranting about every pay rise. Everyone now knows where he stands. Abroad, you always have to start over and that can take a very long time in certain sectors.”
Van Craeynest qualifies this so-called social peace. “It remains a difficult debate. Witness to this: with our strike days we are still among the top five in Europe. Despite the index, we have now also had national action days from the unions for more purchasing power. If I tell that in the Netherlands, they will not understand.”
Downsides: wage cost handicap and rigid labor market
An important drawback is that in this way the bill for the loss of purchasing power is rather quickly placed with the companies. “Under normal circumstances, in which the cost of living rises by two percent per year, such an index is not a problem,” says Van Craeynest. “But in these exceptional circumstances, wage increases are implemented much faster than in the countries around us. Over time, that balance will recover, because people in those countries will also earn more. But that happens gradually, after negotiations. It ensures that wages in our country are too high for several years and cause economic damage for companies that have to compete internationally.”
According to Professor Ive Marx (University of Antwerp), this economic damage should be taken with a serious grain of salt. “Study after study has shown that the gross profit margins of companies have risen sharply in Belgium, more sharply than abroad. In fact, they were never higher. VBO chairman Pieter Timmermans always reports that this will change soon, but we have not noticed that much so far. We also see that the number of bankruptcies has not risen sharply after the corona crisis, which we were also warned about by the employers.” Van Craeynest makes a comment here. “It is true that companies may not go bankrupt immediately. But what often goes under the radar is that large companies will relocate certain parts of their activities. And that does not benefit the competitive position of the Belgian economy.”
Marx sees another major drawback: he still links the index to the low employment rate in our country. “We don’t seem to realize what an anomaly this rigid system has become, where we have both upper and lower limits on our wages. Politics has such a heavy hand in wage setting. And that leads to little mobility on the labor market. We are, as it were, in a golden cage, which is difficult to get out of.”
The future: immovable house of cards
Many economists and international organizations agree that something should change in the Belgian system of automatic wage indexation. There are many options, ranging from indexation in cents instead of percentages, a ceiling above which no more indexation takes place, to a complete abolition and the release of wage setting. But what everyone agrees on is that nothing will change in Belgium in the coming years. “The debate is blocked on all sides,” says Van Craeynest. “The wage standard and automatic indexation are linked. The whole system needs to be redesigned, but politically this will be difficult. So I don’t think they will intervene. Or maybe only when a large company leaves our country and when the economic damage has already been done. It certainly won’t come from this government and it won’t come from the next.”
Marx compares it to a house of cards, which can very easily collapse with a small change, but which is very solid at the moment. “However, there would be nothing against opting for a recalibration. Look at countries such as the Netherlands, Germany and the Scandinavian countries, which are also well-functioning countries with a high degree of equality and social protection. We won’t end up in the Far West if we drop the index system. We need a new social pact.”
Marx does not want to dramatize the current situation. “We are champions in incrementalism adjustments, things are moving forward here with mouse steps. The situation is not of such a nature that we are facing a crisis. We are still a prosperous and strong economy. Sometimes outsiders see the situation too black. We are a very strange country, where there is a big difference between the policy on paper and the practice on the shop floor. Look at our legislation on night work. In principle, this is prohibited, but there are numerous exceptions. The same applies to the index. It’s certainly not perfect, but we shouldn’t make a drama out of it either.”
This is how our net salary is calculated
If you have already looked at your pay slip, you will notice that the calculation is not always transparent. You may have already given up trying to decipher it. We try to explain it to you step by step.
First and foremost, the starting point is the gross salary. A social contribution must be paid on this, which is usually 13.07 percent, although there are certain discounts for low wages. After that, taxes still have to be paid on the remaining amount with rates of 25 to 50 percent, although there are all kinds of discounts at federal and Flemish level to ease the suffering. And there are other factors that play a role, such as the family situation – the more children, the less taxes you pay -, the professional costs – which are deducted from the gross salary – and other possible deductions – the pension savings or the housing bonus. To prevent you from having to pay everything in one go, your employer deducts a monthly amount from your salary that is regarded as an advance on taxes, the so-called withholding tax. After you have completed your tax letter, it will be checked whether too much or too little money has been deducted. If you have paid too much during the year, you will receive a certain amount back from the taxes. If you have paid too little, you must pay extra.
Finally, on top of your gross salary, your employer will also have to pay a social contribution of 25 percent. We have put it to the test for a gross salary of 2,000 and 5,000 euros and we reveal how much you will have net before and after indexation, how much tax you will have to pay and how much social security contributions. Below we have developed a calculator where you can make that exercise for your own pay. Try it out and find out how much extra you’ll get in January. The end result may differ slightly from reality, depending on your specific family situation.