by Frank Thomas
The Dutch three-tier pension system -- state AOW (Social Security) Pension, Supplementary Pensions based on terms of employment between employers and employees, and Supplementary Personal Pensions anyone can buy from insurance firms, companies or banks -- are reputed to be the best in the world. At the end of 2009, total assets of Dutch pensions funds were $745 billion or 130% of GDP -- the highest of all OECD countries by far. This enormous sum is invested in bonds and stocks and is thus sensitive to volatility in the financial markets. During the years 2001-2003 preceeding the bubble, the Dutch very wisely reduced significantly the level of pension fund investments in stocks while sharply increasing investments in bonds. Result? Modest exposure to plummeting stock markets in 2007-09.
Still, the Netherlands is no exception to the rising pressures being placed on pensions (and health care) as a result of the financial and economic crises, low interest rates, and particularly the aging population, increasing life expectancy, and recourse to expensive high-tech medical services. So, true to Dutch pragmatism of timely confronting changing macro-economic realities head-on -- unlike the enduring systemic political squabbling and paralysis on such serious matters in the U.S. -- last Friday, a majority of Dutch Parliament MPs announced their support of a reformed state AOW pension deal agreed to among unions, employers, and ministers. The reforms still have to be approved by individual union members and some influential union members have said they will vote no.
The main reform points of the state AOW (Social Security) pension agreement include:
- The pension age will go to 66 in 2020 and probably rise again to 67 in 2025.
- The pension will increase by 0.6% plus inflation per year from 2013 to 2028.
- The pension of people who stop working earlier will be cut by 6.5% per year. Those who work longer than 67 will receive 6.5% more for each extra year.
The main reform points on corporate pensions include:
- Corporate pensions will not work with nominal guaranteed payouts but will vary with stock exchange developments. The effect of changes will be spread over a maximum of 10 years, removing the need for quick fixes. Details have to be worked out. One alternative for the current nominal contract may be a "hybrid contract" composed of two layers -- one layer of lower accrual but with a large degree of nominal security and a second layer that is fully performance-dependent (profit sharing). A second alternative may be a completely flexible contract.
- Companies and employers can determine the balance between risk and security in terms of the corporate pension fund investment mix.
- Premiums will be split between workers (one-third) and employers (two-thirds) and employers will no longer have to top up the fund if it runs into trouble.
No final conclusion has been reached on how to handle accrued pension rights: freeze them and set them apart or bring them under the enforcement of the new rules. The second option is unlikely and probably not even possible. Trade unions are vocal in pressuring officials to respect accrued pension rights.
And here we are in America constantly spreading lies and fear-mongering stories about how our Social Security system is near bankruptcy. Actually it has been and is in a SOLID financial state -- punctuated by fact that over the years our Federal Government has borrowed substantially from the surplus funds built up in the Social Security Trust Fund. All that needs to be done to preserve the fund's financial integrity and solvency over the next 30 years is to do (in some appropriate way) exactly just what the Dutch have timely done, namely, set the policy for raising the qualifying retirement age from 65 and 67 (or higher) as dictated by the fiduciary math calculations.
SIMPLE? Actually YES! ... but NOT SIMPLE in our broken down political system where everything's about getting re-elected, being ideologically pure to self-interests rather than serving the national interest.
Instead, populist fundamentalists with tunnel vision are popularized as they patronize the libertarian drumbeat of privatization of everything governmental to truly enjoy the greater "benefits-freedom-equality" (better said, "excesses") of unregulated capitalism! This axiomatic thinking leads to stupid flights of fancy, for example, to claim government intervention never does any good overall for society as opposed to the effects of the market. If accepted, this fools' dogma would be the deathknell of affordable Social Security and Medicare for older generations to come.
Meanwhile, in a spirit of solidarity, the Netherlands like other mature European countries are promptly, painfully, fairly, cleverly restructuring the financial imbalances in their social-economic models ... while not throwing out that overriding, long-standing European value, "WE ARE ALL IN THIS LIFE TOGETHER."
