New pension agreement in The Netherlands: more flexibility, higher retirement age, less warranties. Younger workers in fact foot the bill for the baby boomers.

Just like many other countries, The Netherlands suffers from an ageing population. Not only are there already more elderly people than youngsters (See graph 1 and 2 (source: www.CBS.nl)), but the elderly people have a longer life expectancy too: from 79 (M) vs 82.8 (F) in 2011 to 82 (M) vs 85 (F) in the estimated year of my retirement 2033.  

Demography in The Netherlands in 2011 (www.cbs.nl)

Demography in The Netherlands in 2033. (www.cbs.nl) 

Therefore the elderly people take a growing claim on two of the three main pillars of the Dutch pension system:

• Pillar 1 AOW (General Old Age-insurance Law, paid by the Dutch Government) 
• Pillar 2 Pensions built-up by working people at pension funds and insurances 
• Pillar 3 Personal insurances, like life annuities

The problem is that a decreasing group of workers needs to pay for an increasing group of retired people, until the situation stabilizes in (about) 2040.

The Dutch government and representatives of united employers and employees (aka the Social Partners) are very much aware of this demographic time bomb. Therefore they introduced a renewed pension system in 2010, that needed to be approved by the Second Chamber of Parliament and by the Social Partners. Today was the day of the approval of the new pension system.  

These are the outlines of the new pension system (link in Dutch) :

• The AOW-age will rise to 66 in 2020 and to 67 in 2025 
• The AOW-pension will rise in 2013 by 0.6% per year 
• People can choose when they want to stop working through a flexible AOW pension. 
• For every year they work shorter 6.5% of pension is withdrawn; for every year they work longer 6.5% is added. 
• The additional pensions [pillar 2 – EL] are made more shockproof 
• It becomes easier for elderly people to continue working after reaching the age of 65 years.

The financial newspaper Het Financieele Dagblad (www.fd.nl) writes the following post (link in Dutch) on this subject:

Pension agreement saves €700 mln
The pension agreement saves €700 mln. That was stated by Finance Minister Jan Kees de Jager. According to Prime Minister Rutte the agreement is an ‘autograph for the future’. He spoke of a solid agreement that states the solidarity that exists between the generations. ‘This is a beautiful pension system that is affordable and solid and where more people can enter the labor market’.

Structurally the agreement delivers a sustainability profit of 0.7% of GDP, €4bln.
All parties involved should present the agreement to their rank and file.‘People get the choice to retire sooner or later’, according to Minister Henk Kamp of Social Affairs. ‘In 2020 you can choose to retire with 65, 66 or 67. In 2025 you can retire with 65, 66, 67, 68 or 69. Every year you stop sooner, will cost you 6.5% of your AOW. Every year later will yield you 6.5% more AOW. 

According to the agreement, the height of the pension payments (pillar 2) is not warranted anymore, but it does depend on the yields of investments. The pension rises with the inflation and every year there is an extra 0.6%.  Stopping with working earlier is possible, but against a lower payment. 

Chairman Henk van der Kolk van FNV Bondgenoten, the largest union within the FNV organization (FNV is a union of separate labor unions), stated he will not vote in favor of the agreement. He thinks the agreement doesn’t contain enough warranties on the height of the pension payment. Also he called the yearly extra raise of the AOW payment with 0.6% until 2028 ‘a present paid with one’s own money’, as at the same times the elderly discounts and subsidies are withdrawn to pay for this.

Van der Kolk’s third objection is, that employers don’t want to agree centrally to also pay an amount when a pension hole originates from a malaise on the financial markets. According to the agreements, the unions could ask for an employer’s share in the pensions at the de-central CAO (collective labor agreement) negotiations. Such a contribution would come at the expense of the other terms of labor, like more salary. To Van der Kolk, this is insufficient.

Forget the blah-blah from the Prime Minister Mark Rutte. Every politician wants to have his own landmark or ‘monument’, that will put his name into history. The new pension plan is destined to be the landmark for Prime Minister Rutte, therefore the bragging. Especially in case of this cabinet, it will be very hard to do something really substantial, so this pension plan will be celebrated like a true victory.

But I always try to dig a little deeper. It seems that the new pension plan does a lot of sponsoring for everybody that will be 65 before 2020 (hence: the babyboomers) at the expense of everybody that is below 65 in 2028 (hence: the people that are from 1963 or younger).

It is a kind of Robin Hood scheme. The older people (current retirees and baby boomers) ´steal´ from the youngsters and leave them behind with a lot less money to share:

·      Many of the current retirees already stopped working with 60 or 55, due to:

o  all kind of expensive extra arrangements, like the ‘early retirement arrangement’ (VUT) that were paid for by my generation and younger generations and;

o    the non-existent obligation for 55y-old’s to apply for a job, until 2000?!

·      The AOW should be paid to more and more non-working people, by less and less working people (see graph 1 and 2 again)

·    The AOW is increased with 0.6% every year until 2028. And what happens then? For my generation (1966) and especially for the people who are 25 now? Who will pay their pension?

·     The employers seem not to share in the burdens of this pension plan: the employer chooses the pension fund / insurance and the employee runs the full risk of bad investments of this pension fund / insurance.

Every aspect of this pension plan smells of the fact that the labor unions represent an aging and diminishing group of employees: the 50+ workers:

·    The 50+ group (the grassroots of the labor unions) benefits the most from this pension plan.

·    The 45- group mainly pays for it, without any warranties, as this group was hardly represented by the unions, during the negotiations.

The title and contents of the following piece speakes volumes:

Pension agreement is like a ‘hustler’s trick’.

The recent pension agreement targets to make the Dutch pension system future-resistant. But in fact, it is more like a hustler’s trick: the current and soon-to-be retirees get a good pension with a good indexation on the expense of younger generation, who might get stuck with nothing in their pockets, according to pension specialist Theo Kocken. 

“The current agreement wants to exchange nominal security for a chance on indexation and spreads financial drawbacks, instead of discounting those directly. The retirees of today and tomorrow keep their pension with a good chance of indexation, but the chance for a good pension for ‘the day behind tomorrow’ diminishes.
 The new agreement doesn’t state explicitely that nominal security should be given up, but the road to nought security and the chance for a very high or very low pension is the route of choice” according to Theo Kocken. “This isn’t the worst yet. What is a real disgrace, is the proposal to discount the common pension fund in such a way that it seems there is surplus money in it. 

According to the agreement, the value of the common pension fund will be calculated, based on expected future yields on investments. Calculated in this way, it seems that the payment obligations of the pension funds are lower than they are in reality”. 

Again Kocken:”a pension fund that in reality has just enough money to pay a nominal pension now, with this system suddenly seems to have surplus money. That paper surplus triggers a full indexation, making the pension fund to hand out money to the current generation that was meant for the next generation. It’s just an optical trick”.

The remainder of this absolute must-read article (unfortunately in Dutch) tells of the Robin Hood-tricks (the older employees ‘robbing’ the younger employees) that are locked-up in this pension agreement. It prepares me mentally for a long-lasting career (working until 70?). And it makes me especially sorry for everybody that is 25 now and works his butt off to pay for the current and future retirees, knowing there might be nothing left for him anymore.

All in all, the new pension plan gives me a bad taste. I wish that individual workers have better opportunities to build-up their own pension, by letting them make their own choices and decisions during their career.

Now your employer decides where your hard-earned pension money is stashed. And the government? Well, what do you expect from a cabinet where the average age is 55+.