WP 48 - Population ageing in the Netherlands: Demographic and financial arguments for a balanced approach

Wiemer Salverda

to 27 years, with only 10 to 20% of them coming close to the 40 years needed for a full accrual of
70%. Regrettably, we know of no systematic statistical data on pension accrual.3

So what does the future now hold for the incomes of those aged 65 and over and the funding
required? When it comes to average individual incomes, we can only make assumptions - for
example, that the present ratios will continue unchanged, which in effect means that incomes for
those aged 65 and over, and particularly the AOW, will simply share in the fortunes of the
economy. Thus increases in productivity are implicitly taken into account and can therefore not be
considered separately as a source of future funding, as Jacobs (2006) correctly points out. Because
of marked differences in funding for the two, I will discuss the public pension and occupational
pensions separately. The AOW is generated by the calendar population on the basis of pay-as-you-
go, while occupational pensions are paid for by the cohort population on the basis of capital funding
out of pension savings. Expectations are that social-security payments to people aged 65 and over
will also increase as a consequence of the growing insufficiency of AOW coverage, especially for
immigrants who have lived in the Netherlands for less than the required 50 years. As the total effect
is negligible4 and people may receive the missing amount as social assistance instead, I will not take
this into account.

3.1 Public old-age pension (AOW)

There has been considerable discussion about the future scale of the AOW, but it is commonly
assumed that its share of GDP will rise sharply, give or take a percentage point or two. The CPB
currently puts it at almost 9%, while the Social Insurance Bank (SVB) is forecasting 7% (Van Eekelen
and Olieman, 2001). As already mentioned, GDP in itself does not fund the AOW - it is better to
directly tie the funding requirement to the income of 20-64-year-olds.

Forecasts have as much value as population projections or assumptions about income have. Table 2
presents a rough estimate based on the IPO data, which combines today’s income levels with
projected ratios for 2038, when the value of the demographic calendar-OADR will reach its peak.
The increase in the number of joint AOW households has been taken into account. An interesting
feature of population forecasts as we have seen is that men rather than women will account for
much of the additional life expectancy. Perhaps unexpectedly, this means that more women than is
currently the case will be sharing a household with a man - a trend that we have been observing for
some time now (Kroniek, 2005). These women will then be entitled to only half the AOW for
married people, and not to the 70% for single people.

3 It implies that international comparisons that put Dutch pensions at 70%, risk to be misleading.

4 At the end of 2004 persons aged 65 had an average accrual of about 47 out of maximum 50 years (Verschuren, 2006, Figure 1)

AIAS - UvA

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