The Dutch public pension system, sustainable or not?

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The Dutch public pension system,

sustainable or not?

Bachelor thesis

Tim Horsmeier

Juli 15, 2014

University of Amsterdam Faculty: Economics & Business Student number: 10047808 Supervisor: Aaron Kamm MSc.

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1. Introduction

The public pension, as we know it today, was implemented in 1957 to face the poverty among the elderly. The ‘Algemene Ouderdomswet’ (AOW) provided a basic pension for all of the Dutch citizens over the age of 65 (Historiek.net, 2009).

Over the years the Dutch pension system has developed into one of the best pension systems in the world. The university of Melbourne together with pension advisor Mercer created an index and the Netherlands ranked number one in sustainability, adequacy and integrity, in 2010 (Volkskrant, 2010).

However, in the last couple of years there has been a lot of discussion about the sustainability of the AOW. Because of the ageing population, the costs of the AOW will considerably rise over the next decades. In 2012, after years of discussion, the government implemented a measure to deal with the increasing future pension costs. They introduced a gradual deferral of the retirement age to 67 years in 2023. After that the age will depend on the life-expectancy (NRC, 2012).

This new measure led to intense discussions. There were a lot of people who criticized the change in the AOW (NRC 2012). That is why I want to research what the effects of the raise in the retirement age will be like and if the AOW is sustainable in the future when its costs have gone up significantly. My research question is: Is the Dutch public

pension system sustainable with the ageing of the population, and how does the increase of the retirement age affects this sustainability?

In order to answer my research question I will do a literary review. First, I will study the various pillars of the Dutch pension system. After that, I will describe the demographic changes over the last 60 years, I will make a prognosis of the current trend and explain the factors that cause the Dutch population to age. The measures taken by the government to keep the public pension sustainable will be described and the arguments for or against these measures will be discussed. Followed by a description of alternative measures and their pros and cons. The Dutch pension system will be compared with the pension systems of other countries in Europe. Finally, I will draw my conclusion and answer the research question.

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1. The Dutch pension system

The Dutch pension system consists of three pillars: the public pension ‘Algemene Ouderdomswet’ (AOW), a private pension through the employer and a voluntary individual pension. In this section I will discuss these pillars. Furthermore I will discuss the division between the three pillars.

2.1 First pillar: the public pension

The AOW was installed in 1957 but the plan originated from Germany. In 1889 chancellor Otto von Bismarck introduced a pension system. Employees paid taxes and received a pension from the age of 70 (Historiek.net, 2009).

The first social law in the Netherlands that partly looked like a pension was the ‘Invaliditeitswet’ enacted in 1913. Employees older than 70 were considered to be handicapped and received a small payment from the state. This law was extended in 1919. The retirement age was lowered to 65 years and the payments were increased by a small amount. It still was not a real social security law: not everyone above 65 received these payments and the payments were still small (Historisch Nieuwsblad, 2009).

In 1947 a solid base for the current AOW was laid, with the ‘Noodwet Ouderdomsvoorziening’. This public pension guaranteed social security payments to men and single women above the age of 65. The pension was meant to be temporary and was replaced by the AOW in 1957. Every employee had to pay a premium and with this premium a basic pension was provided for everyone above the age of 65. Since the introduction of the AOW life expectancy considerably increased. So the AOW-premiums paid by the employees alone could not cover the pensions. General funds were needed for a part of the finance (historiek.net, 2009).

The AOW is financed by a pay-as-you-go system (PAYG). The employees pay a part of their income on labor and housing (box one in the Dutch tax system) as a pension-premium. The retirees do not have to pay this pension-premium. The government uses the premiums to provide the retirees with a basic pension. This way a transfer of income is generated from the working force to the retirees (Roseveare et all., 1996).

The Minister of Social affairs and Employment sets a percentage for the premiums each year and the difference between the total amount of premiums collected and the total payments on the pensions is paid out of general funds (SVB, 2014a).

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Every citizen of the Netherlands gets a basic AOW pension when they reach the retirement age. The only requirement is that the retiree has lived in the Netherlands for the 50 years before they reach the retirement age. So every year someone has lived in the Netherlands they build up two percent of their AOW pension. If a retiree cannot completely meet this requirement, they receive only a part of the AOW pension at their retirement age (SVB, 2014b).

The amount of pension payments the retiree receives also depends on marital status. A retiree that is single receives 70 percent of the minimum wage as payment. A retiree with a partner receives 50 percent of the minimum wage (SVB, 2014c).

2.2 Second Pillar: the collective private pension

The second pillar consists of a collective private pension. This pension is based on a capital cover system. This means that employees in collaboration with employers save money through the payment of premiums for a collective pension scheme. The money is controlled and invested by pension funds (Van de Grift, 2008).

The capital cover system can be subdivided into defined benefit and defined contribution. Defined benefit means the pension benefits are fixed in relation to the wage. No matter the outcome of the investment the pension funds made, the pension benefits are always the same. The risks are carried by the pension funds. Defined contribution is the opposite. The contributions through premiums are fixed, the outcome of the investment is not. The risks lie with the employee. Defined benefit was most used by pension funds, but recently a lot of funds switched to defined contribution (Blake, 2000).

This is not the only change the pension funds have made over the last couple of years. They also switched from unconditional to conditional inflation correction, which means that pension funds do not always correct the pensions for inflation. In practice, most of the pensions are still corrected for inflation. Furthermore, over the last couple of years most pension funds started basing the pension benefits on the average salary an employee earns during his working life instead of taking the last and often highest salary earned by the employee as a base (Van de Grift, 2008).

The total value of the pension that the employee saves, depends on his employment history, the pension scheme of the sector in which he worked and the amount of salary he earned during his working life.

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The Dutch pension funds are really large in comparison to other countries, as shown in figure 1. This is partly caused by the high participation rate among employees and employers (Van de Grift, 2008).

2.3 Third pillar: the individual pension

The third pillar consists of products that act as an individual pension, such as annuity policies. The third pillar is mostly used by self-employed workers. They do not save for their pension in the second pillar because they do not have an employer. Also some economically inactive people save for a pension scheme individually. The third pillar is based on a capital cover system.

2.4 Division within the pension system

Figure 2 shows how the total pensions are divided over the three pillars. The AOW is the biggest pension provider with 50 percent. The private pension is almost as big with 45 percent. The third pillar plays a marginal role because it mostly serves self-employed workers.

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3. Demographic changes and ageing

In this part of the thesis I will look at the changes of the population that are causing the rapid ageing of the Dutch population. First I will look at the relevant demographic changes over the last 60 years. Then I will give a prognosis of the changes in the future and explain the most important factors that cause ageing.

3.1 Demographic changes over the last 60 years

The Dutch population has been increasing over the last 60 years (see figure 3). This increase has two reasons: natural growth and migration. Natural growth is the number of new-born children minus the number of deceased people. In the last 50 years more than 10 million children were born and six million people died. So the natural growth was around four million. The balance of migration was one million: six million immigrants minus five million emigrants. (Van Nimwegen, 2012, p. 51).

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Although the population clearly increased in the second half of the last century, the growth rate of this increase declined. In 1950 the growth rate was around 15 percent and it slowly declined towards less than 5 percent in 2005. This is mostly explained by the decrease in natural growth (see figure 4).

As a result of this decline in natural growth you can see that the population has slowly been ageing since 1950. In 1950 the average age of the Dutch population was 31 and throughout the years this increased to 41 in 2014 (see figure 5).

Figure 3: population growth 1950 - 2013 (Centraal Bureau voor de Statistiek, 2014a).

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9 3.2 Prognosis 2014 – 2050: ageing

The Dutch population is ageing, and the prognosis of the CBS (see figure 6) is that this will continue in the near future. In figure 6 you can see that that the size of the population will increase only marginally in the next 40 years. However, the relative number of people over the age of 65 will increase sharply.

The so-called grey pressure increases, meaning the number of people over 65 divided by the potential labour-force (20-65 years). The CBS expects that the grey pressure

Figure 5: average age 1950-2014. (Centraal Bureau voor de Statistiek, 2014c)

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will be almost twice the size in 2040, from what it is now. In 2012 the grey pressure was 0.27 and the expected value of the grey pressure in 2040 is 0.49. In comparison: in 1900 the grey pressure was approximately 0.125, so one senior (65+) stood against eight potential workers (Van Dam et all., 2013, p. 41).

Figure 7 shows the change in the age composition from 1950 until 2048. It shows that in 1950 there was a relatively large share of younger people and a smaller share of older people. The prognosis of 2050 is that the centre of gravity will move upwards. The relative share of older people increases over time: the population is ageing.

3.3 Factors that cause ageing in the Netherlands

There are four factors that are most important in explaining ageing in the Netherlands. The first is the so called ‘baby-boom’. The period after WO II is characterized by a large number of new-born children, as shown by figure 8. These ‘baby-boomers’ will turn 65 in the next couple of years (the first ones turned 65 in 2011). This explains the increase in the number of people above the age of 65 (van Nimwegen, 2012).

The relative and absolute increase of people over 65 years is thus the effect of the birth-rate. Figure 8 shows that the birth-rate is high after WO II and stays high until the end of the 1960’s. After that the number of children per female remains unchanged at approximately 1.7 (CBS, 2014f). Important factors causing this drop in the number of children per female are individualization, secularization, increasing labour participation of women and the introduction of the birth-control pill (Fokkema & Dijkstra, 2007).

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The baby-boomers (born 1945-1965) did not get many children of their own. So, when these baby-boomers reach the retirement age and the number of new-borns is low, ageing emerges.

Besides the birth-rate, the mortality-rate also plays a big role. Not only are there more people reaching the age of 65, but the ones that do, die at a rather higher age (see figure 9). For a women turning 65 in 1980, the rest of her life expectancy was approximately 14 years. For a women turning 65 in 2030 her rest of life expectancy will be approximately 20 years (see figure 9).

The positive balance of migration slowed the ageing down over the last 60 years. The average age of a non-western immigrant was 30 years in 2012 and that of a Dutch-born

Figure 8: average child per female. (Centraal Bureau voor de Statistiek, 2014f)

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person 41.2. But in the future, as the immigrants get older, they will start to contribute to the ageing of the population (Garssen, 2011). The number of non-western immigrants will rise from 78 thousand to 780 thousand in the period 2012-2060. This causes the share of Dutch-born people over 65 to decrease from 87 percent to 73 percent. Figure 10 shows that in 2000, the share of non-western immigrants above the age of 65 was marginal. But this will increase over the years even after the peak around 2040. Figure 10 shows that western immigrants already contribute to ageing. With their long migration history and low fertility, the average age of the western migrants was 42 years in 2012 (van Nimwegen, 2012).

John Bermingham (2001) also concluded that although many people think that immigration decreases ageing, the overall effect of immigration does not decreases the rate of ageing. Van Imhoff en Van Nimwegen (2000) calculated that if immigration is used as a device to stop the ageing of the Dutch population, 17 million people need to migrate to the Netherlands over the period 1997-2050.

4. Measures taken by the government

Chapter 3 showed that the Dutch population is ageing. This puts a lot of pressure on the public pension system, since more people will benefit and less people will contribute. The

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Dutch government took action to ease off the pressure on the AOW. First, I will discuss the main measure taken by the government: the raising of the retirement age. Next I will look at the other important goal of the government: increasing the labor-participation among older workers. Finally, I will shortly discuss the problematic of predicting for decades into the future.

4.1 Raising the retirement age

In order to keep the AOW sustainable, the Dutch government passed a bill to raise the retirement age, in the summer of 2012. The government implemented a gradual raise of the retirement age to 67 in 2023. They chose this gradual approach to mitigate this change for the people who are close to the retirement age (Rijksoverheid, 2014a). Table 1 shows the gradual increase of the retirement age towards 67 in 2023.

Born between: Year AOW is received: Age AOW is received:

01-01-1947 – 30-11-1948 2013 65 + 1 month 01-12-1948 – 31-10-1949 2014 65 + 2 months 01-11-1949 – 30-09-1950 2015 65 + 3 months 01-10-1950 – 31-07-1951 2016 65 + 5 months 01-08-1951 – 31-05-1952 2017 65 + 7 months 01-06-1952 – 31-03-1953 2018 65 + 9 months 01-04-1953 – 31-12-1953 2019 66 01-01-1954 – 30-09-1954 2020 66 + 3 months 01-10-1954 – 30-06-1955 2021 66 + 6 months 01-07-1955 – 31-03-1956 2022 66 + 9 months 01-04-1956 – 31-12-1956 2023 67

After 31-12-1956 Unknown Unknown

After 2023, the retirement age will depend on the average life-expectancy of the Dutch population. The retirement age will be calculated annually and implemented five years later. For example, the retirement age of 2024 will be calculated in 2019. This is calculated with the following formula: V = (L - 18.25) - (P - 65). Where V is the amount of the increase in retirement age. L is the expected rest-of-life expectancy after 65 in the year of the increase in retirement age. P is the retirement age in the year before the increase in retirement. When V is smaller than 0.25, it will be set at 0, when V is bigger than 0.25 it will be set at 0.25 (meaning an increase of three months) (SZW, 2012).

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The CPB (Centraal Planbureau) calculated that the increase of the retirement age lowers the pressure on the public pension system. Figure 11 shows that the increase causes the AOW-pressure to drop. The AOW-pressure is the number of people receiving AOW divided by the potential labour-force. At its peak around 2040, the AOW-pressure will be approximately 15 percent lower. This will have a large impact on the budget deficit. The budget deficit will decrease from a deficit of 4.5 percent of GDP in 2010, to a surplus of 0.4 around the year of 2080. This increase is largely the effect of the increase in retirement age and reforms in de healthcare for the elderly (Smid et all., 2014).

Opinions are divided about whether the increase of the retirement age is useful. Goudswaard (2011) suggests that raising the retirement is a justified measure, because the expectancy has increased over the last 50 years. And more importantly, the life-expectancy in good health has increased so people are able to work longer. In 1957, when the AOW was implemented, the life-expectancy after 65 was 14 years on average. This has increased to 20 years on average nowadays. Goudswaard suggests that the increased life-expectancy justifies raising the retirement age.

De Beer (2009) also uses the rise in life-expectancy as a reason to defer the retirement age. He explains that there are three phases in life. First a youth phase, where we learn and prepare ourselves for our second phase. In the second phase, work is the main objective. Then the last phase, where we are allowed to enjoy the last years of our lives. In comparison to 60 years ago, the active working phase is a lot shorter. People start working at a later age, work shorter and die later. On the other hand, the total size of the three

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phases has increased due to the rise in life-expectancy. De Beer thinks it is only logical if this extra years of life is divided over all the phases. Raising the retirement age is then self-evident.

Verbon (2009) states three reasons why the raise of the retirement age is not the right measure. First he explains that when the AOW was implemented, the primary goal was to guarantee a basic income to the poorest retirees. The raise of the retirement age stands in contradiction with that goal. People with a lower social-economic position in society have a lower (healthy) life-expectancy and fewer resources to compensate the loss of AOW-pension. A raise of the retirement age would hit these people relatively harder. Secondly, Verbon (2009) thinks that the cost of losing free time should not be neglected. The value of free time could outweigh the total benefits of raising the retirement age. Lastly, Verbon (2009) puts forward that the raise of the retirement age does not necessarily leads to an increase in labor-participation of the older workers. In view of the relatively bad position on the labour-market, older workers could well be reallocated from the AOW to other more expensive parts of the social security arrangement.

A study in the U.S.A. also shows negative effects. It concludes that the measures taken by the American government to reduce retirement benefits, such as changing the age of retirement, increased the number of people in the social security disability program. Increasing the retirement age has negative spillover effects to other social security programs, such as the disability program (Duggan et all, 2006).

Staubli and Zweimüller (2012) found similar spillover effects to unemployment. Although the increase in retirement age did raise the average age people retire, only 30 to 40 percent of the employees actually worked longer. So no less than 60 to 70 percent became unemployed and the majority of that group received unemployment benefits.

Both studies (Duggan et all, 2006; Staubli and Zweimüller, 2012) suggests that in order to reduce the negative spillover effects to other social security programs, the labor-participation of older workers has to be increased. So that they stay employed, rather than fall into unemployment or disability programs. The government needs to stimulate labor-participation among older workers.

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16 4.2 Increasing the labour-participation of older workers

The reason why labor-participation among older workers is a problem is the fact that the prospect of hiring older workers is relatively unattractive to employers. Many employers think older workers are more costly. A survey among employers led to the conclusion that 70 percent of the employers think that a larger share of older workers increases their cost. And only 7 percent appear to think that hiring older employees increases their productivity. In the eyes of employers older employees have higher wages, are less productive, have more health costs and impede technological innovation (Van Dalen et all, 2007).

The Dutch government has recognized this problem since the nineties. Before, the government tried to encourage older employees to retire early in order to drive the youth unemployment down, using early retirement schemes (The VUT). The VUT consisted of a high percentage of the last earned salary and was financed by a PAYG system. The early retirement schemes caused the labor-participation in the mid-nineties to drop to 25 percent (Van Nimwegen, 2012).

After 1995 the trend changed. Figure 12 shows that the labour-participation among people over 55 years and older increased from 27 percent in 1996 to 55 percent in 2013. The total level of labour-participation of people over 55 years, is being reduced by the labor-participation of people of 60 and older; but this group has seen a larger speed of growth in the last few years (CBS, 2014h). The average age at which people retire has also increased. In the mid-nineties the average age an employee retired was 59.5 and in 2008 this has grown to 62 (Donner, 2009). The increase in the late 1990’s and the early years of this millennium is partly the effect of economic growth. But more important were the measures taken by the government (Van Nimwegen, 2012).

In 2006 the government abolished the subsidies for early retirement schemes. So if a person wanted to retire before the age of 65, the government would not compensate him anymore, making it more costly to retire early. This encouraged people to work longer.

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The government reformed other social security programs as well. The unemployment insurance system and disability insurance system have become more efficient, causing less people to enter the social security and people that did enter to exit faster. So more people are actually working, increasing the labor-participation rate (Donner, 2009).

Employees are stimulated to work longer by financial bonuses. In 2009 the government introduced a bonus for people working past the age of 62 and a tax cut for people older than 57 (Donner, 2009). In 2013 these measures were combined in the so- called ‘work bonus’ for employees older than 61 (CPB, 2011).

On the other side, financial bonuses for employers, so called ‘mobility bonuses’, were introduced. A bonus of 3500 euro’s (over a three year period) for hiring an employee older than 55. A bonus of 7000 euro’s for hiring an employee with more distance to the labour market, such as a person who is living of social benefits (CPB, 2011).

The government also encourages employees to study during their career. Keeping up with the latest innovations and knowledge makes the employees more productive, even in the later stages of their careers (Donner, 2009).

Although the labour-participation among older workers has increased over the last two decades, the Organization for Economic Co-operation and Development (OECD) concluded that the Netherlands are still lagging behind the best-achievers. In their report

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they come up with some recommendations to increase the labour-participation even further (OECD, 2014).

Firstly, to give people more incentives to work longer, the OECD (2014) recommends to promote long contribution periods in the private pension. This means increasing the length a employee needs to save for a full pension. Secondly, they think it is necessary to sharpen the conditions of the unemployment and disability system even further. To give employers more incentives to hire older workers, the wage setting procedures should be adjusted. Productivity should be the key factor in the wage setting procedure, instead of the total amount of years somebody has worked. Thirdly, they suggest a better targeting of measures to reduce cost-disadvantages, increase employability and promote recruitment of older workers. Finally, to increase the productivity of older employees, the OECD recommends more job-specific training to employees. The OECD concludes that if the Dutch implement these recommendations labour-participation can be increased even further (OECD, 2014).

4.3 The problem with long-term predictions

In order for the government to successfully implement a policy change, it has to know the effect of such a measure in the future. The problem with predicting long-term scenarios is that other factors come into play besides the measure at issue. To deal with this, assumptions about these factors are needed. Assumptions that are sometimes rather shaky (CPB, 2014).

The CPB (2014) predicted the effect of an increase of the retirement age on the government budget. To do so, it had to make some assumptions. For example, the CPB made the assumptions that the nominal interest and inflation rates will be 5 percent and 2 percent respectively. These two assumptions are not really certain if one just looks at the rates in the past. Another assumption the CPB (2014) had to make is that life-expectancy in 2050 is 6.5 years higher than in 2010. In their previous study they made the assumption that the change in life-expectancy was 4.5 years.

The effect of other factors and the uncertainty of the assumptions made about these factors, makes it hard to predict the effect of a government measure in the long-term.

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5. Alternative measures to face the problem of ageing

Raising the retirement age is not the only way to deal with the problem of an ageing population. In this section I will discuss two alternative measures. First, I will discuss the impact of a lowering of the retirement age. After that, I will discuss the switch of a PAYG system to a funded system.

5.1 Lowering the retirement age

Verbon (2009) suggests the exact opposite of a raise of the retirement age. He thinks the retirement age should be lowered to 63. Older workers have a bad position on the labour market and are not hired anyway. Verbon says that the knowledge of older employees is basically outdated and when the retirement age goes up, it will wear off even further, making their position on the labour market even worse. Lowering the retirement age will thus improve their position on the labour market. The second reason for Verbon is that lowering the retirement age takes some of the pressure of the private pension funds (Trouw, 2009). When an employee retires early the private pension fund has to pay the full pension until the retiree reaches the AOW-age. If the AOW-age is lowered private pension funds have to pay the full pension for a shorter period of time. Lastly, Verbon thinks free-time would be better appraised if the retirement age is lowered. Free-time also has a value and by lowering the retirement age, the total value of free-time goes up (Verbon, 2009).

However, figure 12 shows an increase in the labor-participation of older workers. A number of measures, taken by the government, have improved their position on the labour market. And the OECD (2014) predicts that with extra measures taken, the position on the labour market will improve even more. Within this prediction, the raise of the retirement age was taken into account. This will also take the pressure off the private pension funds since the average age of retirement has gone up by the higher labour participation. This contradicts Verbon’s findings.

Börsch-Supan and Jürges (2006) studied the well-being of people who were retired. When they controlled for disability effects, they came to the conclusion that a retired person (someone with more free-time) does not necessarily have better well-being than someone who still works. This study might conclude the value of free-time is not that high. This also contradicts Verbon’s findings.

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20 5.2 Switch to a capital cover system

Another alternative measure is to switch from a PAYG system to a capital cover system. In a capital cover system employees will build their pension by paying premiums. These premiums are invested by pension funds and these funds provide the employees with a pension when they retire. This way people will save for their own pension and there is no problem when the AOW-pressure goes up (Van der grift, 2008). A way to do this, is to merge the first and second pillar into one pillar, with the characteristics of the second pillar. In this way, the collective private pension funds will provide all of the pension of a retiree (Van der lecq, 2010).

But there is a good reason this measure was never taken. There is the problem of transition. If this was implemented, multiple generations would have to pay for their own pensions as well as for the pensions of the current retirees. Otherwise current retirees would have no pension, because in their working-life they did not actually pay premiums for themselves but for the retirees of that time. So multiple generations would have to carry an extra burden (Van der Lecq, 2010).

6. The Netherlands in comparison to Europe

Europe is the most aged continent in the world. Due to the relatively low fertility rates and high life-expectancy, Europe is ageing faster than other continents. But within Europe there are differences when it comes to ageing (van Nimwegen, 2012). In this chapter I will compare the Netherlands with other countries in Europe. First, I will discuss the ageing in Europe. After that, I will compare the Dutch pension system with other pension systems in Europe.

6.1 Ageing in Europe

Figure 13 shows that the Netherlands has a relatively young population in comparison to other countries. In comparison: the Netherlands has a percentage of people over 65 of 16.8, the most aged countries (Germany and Greece) have percentages over 20 percent.

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The reason for the relatively young population of the Netherlands is the so-called ‘baby-boom’ after WOII. The birth-rate in the Netherlands was very high during the first 20 years after the war (CBS, 2014e). But when these people reach the age of 65 in the next two decades, the percentage of people over 65 will increase to the level of the countries that aged the most (Van Nimwegen, 2012).

6.2 Financing of pensions in Europe

There are considerable differences between the pension systems in Europe when it comes to the financing. But the composition of the systems is almost the same. There is a first pillar consisting of a basic pension and a second pillar consisting of a complementary pension (Bisciari et all, 2009).

The first pillar is financed by a PAYG system in all countries. The employees pay a premium and the government uses that premium to finance the pension of the retirees in that same year (Bisciari et all, 2009).

All countries also have a second pillar consisting of a complementary pension. This pension is based on a funded system. Employees and employer both save for the pension of the employee through the payments of premiums (van der Grift, 2008). The biggest difference between the countries is how the pillars are being financed.

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Table 2 shows the amount spent on public pension as a percentage of GDP. The figure shows that the Netherlands has one of the lowest percentages in Europe. The reason for this low percentage is the big role the private pension funds play. In the Netherlands 45 percent of the pensions are being paid by the private funds (van der Grift, 2008). The large amount of the assets (table 2) of the private funds underlines the big role the private funds play. Other countries with large private pension funds, such as Switzerland and the United Kingdom, also have lower government spending on pensions. The low government spending on pensions in Ireland is mostly caused by the low percentage of people over 65 in the country. France for example has a relatively high government spending rate, because the bulk of the pensions is paid by the government (OECD, 2013a).

Country Pension spending gov. % of GDP (2013)

Assets private pension funds. % of GDP (2012) Netherlands 5.1% 155.4% Austria 13.5% 5.3% Belgium 10.0% 4.6% France 13.7% 0.3% Germany 11.3% 6.3% Greece 13.0% 0.0% Ireland 5.1% 49.2% Italy 15.4% 5.6% Portugal 12.3% 8.8% Spain 9.3% 8.4% Sweden 8.2% 10.5% Switzerland 6.3% 113.7% United Kingdom 6.2% 104.0%

The Netherlands is not the only country in Europe that has increased the retirement. Due to ageing most countries in Europe have to deal with the increasing costs of the public pension. In order to decrease the cost of the public pension, they have no other option but to increase the retirement age (Bisciari et all., 2009). For example in the United Kingdom the government has agreed to gradually increase the retirement age to 68 in 2032 (OECD, 2013b).

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7. Conclusion

The Dutch pension system is composed out of three pillars. The first pillar consists of a public pension, the ‘Algemene Ouderdomswet’ and finances 50 percent of the pension system. The second pillar is a collective private pension, based on the capital cover system. This pension is managed by private pension funds and finances 45 percent of the pension system. The third pillar is an in individual pension and finances a mere five percent.

Because of the baby-boomers turning 65, the low birth and mortality rates and the aging of the immigrants, the Dutch population has started aging more rapidly. A peak will be reached around the year 2040. This vast increase in people of 65 years and older will put a lot of additional pressure on the AOW.

The government has taken measures to take some pressure off the AOW. It raised the retirement age to 67 in 2023 and from then on made it dependent on the life-expectancy of the Dutch population. Furthermore, the government took measures to improve the labour-participation among the older parts of the potential workforce.

There are some alternative measures to deal with the ageing problem. But these measures would probably have little effect (Verbon, 2009) or would divide the costs of the ageing problem rather unequally (Van der Lecq, 2010).

Although the Dutch population will age faster than most countries in Europe, the Netherlands seems far better prepared than most European countries when it comes to the future increase of pressure on the pension system. The private pension funds are much bigger compared to other countries. So, the government spending on pensions is much lower.

The well- developed second pillar in the Netherlands is one of the two reasons why I think the public pension system is sustainable. People in the Netherlands are not solely depended on the government for their pensions. So when, due to ageing, the pension costs increase sharply, almost half of these costs (45 percent) will be financed through the private pension funds. This takes a lot of pressure off the AOW and the government budget.

Secondly, I think the measures taken by the government will be effective. The deferral of the retirement age together with the measures taken to improve labour- participation will substantially lower the costs of the AOW and will increase the amount of AOW-premiums paid by the employees. And if the government listens to the

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recommendations made by the OECD (2014), the positive effects of the deferral of the retirement age could increase even further.

The downside of the deferral of the retirement age is the effect on income inequality in the Netherlands. People with a lower social-economic position will be hit relatively harder by the increase of the retirement age. That is why I suggest that the government implement some sort of compensation to the poorest retirees who cannot make up for the income loss caused by retiring later.

Thanks to the big private pension funds and the measures taken by the government the Dutch pension system is doing very well, and with the above-mentioned recommendations the Dutch pension system will be sustainable for generations to come.

8. References

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The Dutch public pension system, sustainable or not?