Bikker, J.A., “Demografische Onevenwichtigheid, Nationale Besparingen en Lopende Rekening,” Maandschrift Economie 58 (3), pp. 202–22, 1994.
Bovenberg, A.L., “Een Nieuwe Fiscale Behandeling van Pensioenfondsen,” Economisch Statistische Berichten 78 (3895), pp. 91–93, 1993.
Hebbink, G.E., “Vergrijzing, Overheidsfinancién en Besparingen: een Overzicht van Recente Literatuur,” Onderzoeksrapport WO&E no. 451/9601, De Nederlandsche Bank, 1996.
Huijser, A.P., and P.D. van Loo, The Ageing Population. Pensions and Contractual Savings, Monetary Monographs No. 5, De Nederlandsche Bank, 1986.
Jansweijer, R.M.A., Gouden Bergen. Diepe Dalen: De Inkomensgevolgen van een Betaalbare Oudedagsvoorziening,” Wetenschappelijke Raad voor het Regeringsbeleid, Voorstudies en Achtergronden, no. V92, 1996a.
Jansweijer, R.M.A., “Te Hoge Verwachtingen rond de Oudedagsvoorziening,” Economisch Statistische Berichten 81 (4040), pp. 24–9, 1996b.
Kuné, Jan B., Wilfried F.M. Petit, Aggie J.H. Pinxt, “The Hidden Liabilities of the Basic Pensions System in the Member States,” Centre for European Policy Studies, 1993.
Ministry of Social Affairs and Employment, “Gespiegeld in de Tijd; de AOW in de Toekomst,” Rapport van de Commissie Financiering Oudedagsvoorziening, 1987.
WRR (Wetenschappelijke Raad voor het Regeringsbeleid), Ouderen voor Ouderen: Demografische Ontwikkelingen en Beleid, Rapporten aan de Regering, no. 42, 1993.
Prepared by Frank Lakwijk.
Residents are also eligible for other benefits: any old or disabled resident of the Netherlands is eligible to receive benefits linked to the minimum wage, and any resident is eligible to receive benefits related to family size and reimbursement for medical expenses arising from serious illness or long-term disability.
Single parents receive 90 percent of the minimum wage, and retirees with a partner under 65 may receive a supplement.
Contract wages are average wage scales in collective bargaining agreements.
It should be noted that the comparison presented by Kunē et. al. presents a biased picture of liabilities because the cost of providing income support to persons not covered by the basic pension system is not included in the projections.
See Kingdom of the Netherlands • Netherlands - Selected Background Issues, SM/94/100 (4/22/94), page 8.
See Huijser and van Loo (1986), pp. 26-27.
Also, the current financing mechanism could cause contribution rates to double, partly because the ceiling on wage income subject to contributions is indexed to prices, not wages [Ministry of Social Affairs and Employment (1996)]: it is known that an adjustment of this mechanism is needed in due course (even if the overall cost of public pensions is manageable), and this adjustment is assumed in the discussion that follows.
In addition, the studies took into account that the intended equality between the public pension and the minimum wage relates to the net (after tax) amounts; the gross (before tax) public pension is determined by adding the applicable tax and social contribution amounts to the targeted net pension. Any increase in the contribution rate for public pensions cuts into net contract wages and thus, through the indexation mechanism, the net minimum wage. The net public pension falls in turn, allowing a reduction in the gross public pension given that retirees do not pay the contribution rate for public pensions. As a result, the contribution rate, which is related to gross pensions, can be somewhat reduced. This restraint of public pension expenditures can amount to a few percentage points of gross wages over the time period considered.
To the contrary, the retirement of older and thus better-paid baby boomers would tend to pull down the average wage, while at the same time contract wages might begin to rise faster, reflecting emerging scarcity of labor.
For example, in the base scenario of Jansweijer (1996), the public pension of a couple falls from 54 percent of net household income of young workers in 1995 to 39 percent in 2040.
Recent preliminary calculations by the Ministry of Social Affairs and Employment (1996) suggest that public pension expenditures may rise by no more than 1 ½ percentage points of GDP (or 2 ¾ percentage points of gross wages) during 1995-2035 in a scenario with low economic growth and wage drift of just ¼ of a percent a year, but details on the mechanism that produces this outcome are unclear.
Hebbink (1996) notes that in all extant reform proposals the maintenance of a collectively financed basic pension is assumed.
The 1995 Annual Report of De Nederlandsche Bank (April 1996) mentions a figure of 5 percentage points of GDP for the expenditure increase resulting from demographic developments in the areas of public pensions and health care.
Health care insurance as part of the social security system currently amounts to about 7 percent of GDP. This insurance is compulsory and implies transfers between young and old age groups that are likely to rise as the population ages.
There are also pension funds for some 36,000 self-employed, including medical specialists.
Some pension funds define benefits on the basis of average salary. Note that even at the -ABP, where long-term participation might be expected to be the rule, the average number of years of participation at retirement was 29 for men and 20 for women in 1994, instead of the “standard” 40 years [Jansweijer (1996b)]. The prorating of the pension implies that, for example, women retiring from the ABP received on average about 35 percent of their last salary.
The loss of real value of built-up pension rights was seen an impediment to job change.
In one case, the notional public pension is computed by indexing the public pension in a base year with the contract wage increase of the company. A renewed freeze of the public pension would thus not affect this company’s supplementary pensions.
Consider a salary increase of f. 100 for a young and older worker. The pension premium (perhaps 10 percent) would be the same amount for each, but would have many more years to earn a return in the case of the young worker, who is hence, from the individual’s point of view, overcharged.
This holds in a model with certain restrictive assumptions, such as a stable population structure and no pension indexation. If the interest rate exceeds the rate of wage growth, capital funding for the financing of old-age pensions would be desirable, while pay-as-you-go financing would be preferable if the reverse held [Aaron (1966)].
To illustrate, Jansweijer (1996a) projects a premium rise from 7 percent of gross wages in 1995 to 26 percent in 2040 in his base scenario that includes a real interest rate declining to -0.4 percent in the long term. If the real interest rate instead were assumed to be 3 percent, the premium rate would still more than double [Jansweijer (1996b)].
The compensation by supplementary pensions is incomplete, because it only applies to employees, and only occurs fully for those with a complete work history (of 40 years).
The higher funding compared to other countries may be a reflection of higher pension benefits.
See SM/94/100, pages 41-44, for a discussion of the practice of declaring binding collective bargaining agreements.
Defined-contribution plans, where the pension equals accumulated contributions including interest, are more individual in nature. However, disadvantages of such plans include the risk of low real interest rates for prolonged periods and high transaction costs [Bovenberg (1993), de Beus (1996)]—the greater the emphasis on individuality, the higher administrative costs are likely to be. The choice of pension system involves difficult trade offs between considerations of return, incentives, degree of compulsion, and equity.
Current workers are grandfathered.