Ageing populations: How the Dutch cope

Economics Department
Page 44 

Ageing is one of the top challenges our economies face. As the OECD’s baby-boom generation reaches retirement there will be fewer workers for each pensioner and so, a greater strain on funding. The Dutch example is enlightening. It is one of the OECD’s more stable economies and, for many, a model of sound policymaking. Yet even to the Dutch, the ageing question has proven a hard nut to crack.

The population of the Netherlands is ageing rapidly. As in other OECD countries, the main causes are the decline in fertility rates since the 1970s and rising life expectancy, especially for the elderly. This is set to reduce the number of workers per retired person to less than two by 2030, down from over three presently. Without action, such a shift will slow economic growth and drive up transfers to the elderly, with taxes and social insurance contributions having to rise to pay for pensions and healthcare. While the Netherlands may be better placed than most other OECD countries to meet these pressures, thanks to its large, funded occupational pension system, the government has nevertheless had to implement policies to ease the costs of population ageing.

Rolling back early retirement has been one priority. More people began retiring before the official retirement age in the Netherlands during the period of industrial restructuring in the 1970s and 1980s. Early retirement schemes were introduced to help them and disability insurance and unemployment insurance were made more attractive for older workers. The idea was to make room for the large inflows of younger workers into the labour force. But today, with those inflows shrinking as the population ages, the Dutch social partners have agreed that incentives for early retirement need to be reduced. Eligibility criteria for disability insurance is now more strictly enforced and using disability (or indeed unemployment insurance) to encourage the departure of older employees has been made less attractive to employers. In addition, early retirement schemes are slowly being replaced by pre-pension arrangements, shifting the burden of the cost from employers and employees from a sector to the individual worker making the decision.

Still, more needs to be done to reduce the incentives for early retirement. While the proportion of the older working age population (55-64) in employment has increased in recent years, it is still only 38% of the total, compared with an OECD average of 48%. The government could accelerate the phasing-out of early retirement schemes by immediately replacing its own schemes for public sector employees with pre-pension arrangements. That way, individuals who decide to retire early would draw a lower pension than were they to accumulate more entitlements by waiting until the official age.

The government could also end current practice of providing automatic legal extension of the collective agreements on pensions to all employees in any industrial sector. Moreover, eligibility criteria for disability insurance still have to be more strictly enforced as it continues to be used as way to retire early --- some 20% of the population aged 55-64 receives disability benefit, more than three times the rate for the rest of the working age population. A new system for screening applicants is being progressively phased in, but given the poor record of previous such initiatives, it may be necessary to adopt a more stringent approach. The government-appointed Donner Commission recommends restricting access to the disability scheme to totally and permanently disabled persons, with persons partially (and permanently) disabled as a result of occupational injuries or diseases being covered by a private employers’ insurance.

The government has also been able to partially pre-fund the expected rise in ageing-related budget costs (about 4.5% of GDP by 2040) thanks to its now lower government debt of 53% of GDP in 2001, down from 77% in 1990. It is now considering a policy of entirely pre-funding these costs and believes this could be done by maintaining a budget surplus of 1.25-1.5% of GDP over the next quarter century. By then government debt would be eliminated. The advantage of this strategy is that it minimises the budgetary pressures and allows for some room to grow debt in the future should the need arise.

A major uncertainty surrounding the scale of pre-funding required, both for the government and for pension funds, concerns the returns on capital markets where the funds are invested. Current equity prices are high in relation to earnings, pointing to lower than historical rates of return. If this continues, it would greatly increase the amount of pre-funding required by pension funds (most pension schemes are defined benefit) and, because of the tax deductions for pension fund contributions, by the government. Already, there has been a wave of increases in pension fund contribution rates following the poor equity market returns for the past two years. If future rates of return fail to match historical rates, this will lead to further increases in contribution rates and/or reductions in pension entitlements. Early action would minimise the risk of labour costs being forced up and give people time to prepare themselves for possibly lower pension entitlements.

The Netherlands is well prepared to meet the challenge of population ageing, not least because of its large, funded occupational pension system. If the government adopts the policy of fully pre-funding its ageing-related outlays and at the same time succeeds in substantially rolling back early retirement, the Netherlands will be very well placed to age in comfort.

©OECD Observer No 231/232, May 2002 

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