Wiemer Salverda
The calendar/cohort distinction is critical when it comes to determining the financial implications of
population ageing. The AOW puts pressure on the (younger) calendar population through a pay-as-
you-go system, while occupational pensions are financed by the participants themselves on a cohort
basis through capital funding. Problems of the latter are not primarily demographic but rather
politico-economic in nature. Cohort ageing is slight, and on the obligation side, the requirements
regarding future pension outgoings based on demographically sound projections are apparent. On
the revenue side, there were large negative returns on investments in 2000-2002 after the dotcom
bubble burst, but that was fully offset within a few years as a result of market recovery and higher
contributions (notably with falling demand in the domestic economy as a result). Now, however, the
anticipated returns are coming under pressure from changing accounting rules and a pessimistic
assessment of future interest-rate levels and share returns. The implications of this discussion are
enormous, but talks are being held by only a small group in the absence of any real political debate.
Benchmarking private providers to the best practice of the funds would fully offset the
consequences of 3% actuarial interest instead of 4%. But the administration costs of occupational
and private pensions is another major and highly relevant factor that is being overlooked in ageing
policies. Neglected in the Netherlands, this issue is central to the British pension debate. Minor
differences in costs have huge consequences because of their long-term effects on individual pension
build-up over 30 or 40 years. In this country, the costs of private administration - responsible for
one third of occupational pensions - are a factor 10 to 16 times higher than those related to the
administration by collective pension funds. The levensloopregeling (life-course scheme), newly
introduced after the abolition of early retirement, can only be administered privately and is
threatening to lead the way in runaway administration costs if people take full advantage of the
continuous opportunities it offers to change the amounts and purpose of their investments and the
choice of bank. Free choice is no free lunch, and these implications are not being given the necessary
attention.
By contrast, the calendar population funds the AOW in the form of a pay-as-you-go system, which
means that the costs will increase significantly as the population ages. The usual discussion, in terms
of GDP, hampers a proper assessment of the income effects. Using age-based income data from the
CBS Income panel survey IPO, we find that the role of the AOW is greater for the income of older
people while that of occupational pensions is smaller (but still growing). A simple exercise applying
the figures for the year 2038 to the current situation (thus with unchanged distribution of any
economic growth) shows that the 20-64-year-old group will have to contribute 12.7% instead of
8.1% of its income in order to maintain the current AOW level. That is in itself a surmountable
burden - no greater than the recent occupational pension contribution increases of 7% in a few
years’ time. The 20-64 age group can compensate by a small 3.5% increase in work participation and
maintain the same real income.
34
AIAS - UvA