Social Europe

politics, economy and employment & labour

  • Themes
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

The Dutch Patient

Bernard M. S. van Praag 3rd May 2018

Bernard M. S. van Praag

Bernard M. S. van Praag

All over the world the Dutch retirement system is considered one of the best but at home it has come under fire. Serious questions are being raised about the stability and sustainability of the pension scheme. Are the concerns justified?

The Dutch pension system consists of three pillars: a basic state old–age pension on a pay-as-you-go basis for all citizens, a mandatory funded occupational pension for employed workers and voluntary pension insurance, mainly used by self-employed. The main components are the first two mandatory systems, each providing about 45 percent of the pensions, with private insurance covering about 10 percent. Together the state pension and the occupational pension provide about 70 percent of average lifetime earnings (subject to differences in earnings and duration of employment over life).

Although international observers assess the Dutch system as good and sound, the majority of Dutch policy-makers stamp it as being in a crisis and unsustainable in the long run. The country report of Bertelsmann Stiftung’s Sustainable Governance Indicators (SGI) comments: “While the pension system is generally strong, a comprehensive reform is underway.” However, it is rather questionable whether there is a crisis in the making and whether a “comprehensive reform” is to be desired.

The public discussion centers on the viability of occupational pensions. There are pension funds for civil servants, for workers in the health sector, and so on; some funds are not industry-wide but tied to a specific employer. Since their beginning six or more decades ago they promised a defined real benefit in terms of an inflation-indexed fixed percentage of wages earned. Since 2010 doubts were raised about the solidity of these pension funds.

Are pension funds underfinanced?

In 2007 the Pensions Act came into effect to safeguard the financial security of pension entitlements. Under this legislation, the Dutch Central Bank (DNB) has to survey and control the pension funds. The main test is to confront a fund’s reserves with the current value of standing future obligations. The inherent problem is the question of how to estimate that current value. More precisely, which discount rate should be used? The DNB, along with the Dutch Cabinet and Parliament, opted for the so-called risk-free market rate, that is, the interest rate on a mix of German and Dutch public debt. Through ECB monetary policy this rate has fallen in the past decade from 5 to about 1 percent. As a result, the present value of future pension obligations increased tremendously, and funds that had, according to this definition of the coverage ratio, a coverage of 150 percent or more in 2010 had one of about 100 percent or less in 2017.

Our job is keeping you informed!


Subscribe to our free newsletter and stay up to date with the latest Social Europe content.


We will never send you spam and you can unsubscribe anytime.

Thank you!

Please check your inbox and click on the link in the confirmation email to complete your newsletter subscription.

.

The DNB requires for a solvent fund that the coverage ratio should be more than 120 percent. Thus, DNB deems many funds to be underfinanced. Repair measures are prescribed, such as no indexation for inflation, cuts in pensions paid out and reduction in the pension rights of still active workers and increases in premiums. As a result, many pensioners have incurred a loss of about 15 percent in real income since 2010 and a further loss of about 6 percent until 2021 is predicted, adding up to about 25 percent over the decade.

There is no real crisis

The ironic fact is that most pension funds have been making an average net return on their investments (including public debt) of about 7 percent during the last twenty years or more. Since 2008 the wealth of the pension funds has doubled from about €650 billion to more than €1300bn. This being the case, it follows that the severe discount rate prescribed by the DNB is rather absurd and the main reason for the apparent ‘pension crisis ’ in the Netherlands. In fact, the discount rate prescribed by the central bank is lower than that prescribed by any other pension supervisor in Europe except Malta and Cyprus. Given that the crisis is an artifact caused by an unrealistic discount rate, the obvious solution is to re-define the applied rate. If raised from the present 1.5 to 3 percent the general coverage ratio would increase on average by about 20 percent, yielding a comfortable ratio of about 125 to 130 percent.

A second popular reason for the so-called lack of sustainability is the ageing of the Dutch population where the old-age dependency ratio fell from 8 in 1950 to about 3.5 nowadays and is tending to about 2 in 2040. However, this demographic rationale makes no sense either for the Dutch occupational pension system as it is not run on a pay-as-you-go-basis. In essence, each participant saves during his/her working years for their own pension.

The real problems of the Dutch retirement system

The main risk for the Dutch pension system emerges from a completely different direction. The number of workers with fixed employment who therefore take part in the occupational pension system is falling dramatically, shifting to part-time and temporary jobs or free-lancers and so-called ‘flex–work’. Those workers, now about 15 percent of the labor force, pay no mandatory pension insurance except to the state pension AOW. Most are more or less squeezed by their employers and unable and sometimes unwilling to enlist in a voluntary pension scheme. This makes them also cheap for employers. They will merely have social security as their income when they retire. A dramatic development is looming. Very recently, this has been realized by policy-makers who have begun a debate on how to counteract this tendency.

The second real problem of the Dutch pension system, still avoided in any public discussion, is that social security, the basic state old-age pension, is to a very large extent run on a pay-as-you–go basis. Under this system, the younger population pays the pensions of the old, either via a specific levy or out of general tax revenues, or by increasing the national debt. This was no problem when the young constituted a big part of the population with a relatively small part of retirees. However, when the population is ageing the pay-as-you-go system becomes a growing burden. Unfortunately, this situation holds for much of Europe and for other countries worldwide such as China. In fact, the pay-as-you-go system has two disadvantages when compared with the funded pension system. First, the latter is neutral with respect to demographic changes, e.g. ageing, since every individual essentially saves for his own pension. Second, in the PAYG- system, money is just transferred from the young to the old, but used for consumption. The funded system is a source of long-term capital investment, which in the Netherlands equates to about two times GDP now. This may be a lesson for Europe as well. It seems that European pension systems on a PAYG-basis, or the majority, should be replaced, at least partially, by funded systems. Such a shift will be painful and can only gradually be realized. However, it seems urgent to start with this transformation, if we are to maintain decent support for old age.


We need your support


Social Europe is an independent publisher and we believe in freely available content. For this model to be sustainable, however, we depend on the solidarity of our readers. Become a Social Europe member for less than 5 Euro per month and help us produce more articles, podcasts and videos. Thank you very much for your support!

Become a Social Europe Member

Bernard M. S. van Praag

Bernard M. S. van Praag is Emeritus Professor of Economics at the University of Amsterdam.

Home ・ Economy ・ The Dutch Patient

Most Popular Posts

schools,Sweden,Swedish,voucher,choice Sweden’s schools: Milton Friedman’s wet dreamLisa Pelling
world order,Russia,China,Europe,United States,US The coming world orderMarc Saxer
south working,remote work ‘South working’: the future of remote workAntonio Aloisi and Luisa Corazza
Russia,Putin,assets,oligarchs Seizing the assets of Russian oligarchsBranko Milanovic
Russians,support,war,Ukraine Why do Russians support the war against Ukraine?Svetlana Erpyleva

Most Recent Posts

Gazprom,Putin,Nordstream,Putin,Schröder How the public loses out when politicians cash inKatharina Pistor
defence,europe,spending Ukraine and Europe’s defence spendingValerio Alfonso Bruno and Adriano Cozzolino
North Atlantic Treaty Organization,NATO,Ukraine The Ukraine war and NATO’s renewed credibilityPaul Rogers
transnational list,European constituency,European elections,European public sphere A European constituency for a European public sphereDomènec Ruiz Devesa
hydrogen,gas,LNG,REPowerEU EU hydrogen targets—a neo-colonial resource grabPascoe Sabido and Chloé Mikolajczak

Other Social Europe Publications

The transatlantic relationship
Women and the coronavirus crisis
RE No. 12: Why No Economic Democracy in Sweden?
US election 2020
Corporate taxation in a globalised era

Foundation for European Progressive Studies Advertisement

EU Care Atlas: a new interactive data map showing how care deficits affect the gender earnings gap in the EU

Browse through the EU Care Atlas, a new interactive data map to help uncover what the statistics are often hiding: how care deficits directly feed into the gender earnings gap.

While attention is often focused on the gender pay gap (13%), the EU Care Atlas brings to light the more worrisome and complex picture of women’s economic inequalities. The pay gap is just one of three main elements that explain the overall earnings gap, which is estimated at 36.7%. The EU Care Atlas illustrates the urgent need to look beyond the pay gap and understand the interplay between the overall earnings gap and care imbalances.


BROWSE THROUGH THE MAP

Hans Böckler Stiftung Advertisement

Towards a new Minimum Wage Policy in Germany and Europe: WSI minimum wage report 2022

The past year has seen a much higher political profile for the issue of minimum wages, not only in Germany, which has seen fresh initiatives to tackle low pay, but also in those many other countries in Europe that have embarked on substantial and sustained increases in statutory minimum wages. One key benchmark in determining what should count as an adequate minimum wage is the threshold of 60 per cent of the median wage, a ratio that has also played a role in the European Commission's proposals for an EU-level policy on minimum wages. This year's WSI Minimum Wage Report highlights the feasibility of achieving minimum wages that meet this criterion, given the political will. And with an increase to 12 euro per hour planned for autumn 2022, Germany might now find itself promoted from laggard to minimum-wage trailblazer.


FREE DOWNLOAD

ETUI advertisement

Bilan social / Social policy in the EU: state of play 2021 and perspectives

The new edition of the Bilan social 2021, co-produced by the European Social Observatory (OSE) and the European Trade Union Institute (ETUI), reveals that while EU social policy-making took a blow in 2020, 2021 was guided by the re-emerging social aspirations of the European Commission and the launch of several important initiatives. Against the background of Covid-19, climate change and the debate on the future of Europe, the French presidency of the Council of the EU and the von der Leyen commission must now be closely scrutinised by EU citizens and social stakeholders.


AVAILABLE HERE

Eurofound advertisement

Living and working in Europe 2021

The Covid-19 pandemic continued to be a defining force in 2021, and Eurofound continued its work of examining and recording the many and diverse impacts across the EU. Living and working in Europe 2021 provides a snapshot of the changes to employment, work and living conditions in Europe. It also summarises the agency’s findings on issues such as gender equality in employment, wealth inequality and labour shortages. These will have a significant bearing on recovery from the pandemic, resilience in the face of the war in Ukraine and a successful transition to a green and digital future.


AVAILABLE HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us on social media

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube