31 January 2008

IPE: ‘Reform Dutch first pillar’ – OECD

The OECD has said the Dutch first pillar pension system must be reformed as, unrevised, it will account for the bulk of future state funding deficits. In its Economic Survey of the Netherlands 2008, the OECD has called for reform, suggesting retirement age should be raised to 67 and the level of first pillar pensions should be lowered.

The organisation projects despite a well-funded second-pillar, Dutch public spending on pension will increase sharply in the next four decades.

“These trends should improve thereafter, but not by enough to avoid a spiral of debt accumulation,” says the report, adding: “Policy solutions to restore sustainability should focus on containing ageing-related costs, including a reform of the state pension scheme and later retirement.”

The report also advises, for the largely unreformed first pillar, the age of retirement should be raised from 65 to 67 and kept in line with developments in life expectancy.

“The age of eligibility to a state pension (65 years) has been kept unchanged since the establishment of the scheme in 1957, even though life expectancy has increased by more than six years,” states the report.

Increasing the retirement age would not only have positive effects on fiscal sustainability, but also on labour market participation, gauges the OECD.

Additionally, the report finds first-pillar pensions are relatively high in relation to average income - about 31% of average earnings - in comparison to neighbouring countries.

“Indeed, simulations by the Secretariat suggest lowering the level of first pillar pensions would have a favourable effect on labour participation and would improve public finances substantially, although this would score low in terms of equity as some people would be worse off,” concludes the report.

The organisation also suggests additional changes to the second pillar pension system in the Netherlands.

The second pillar pension system has moved from being mostly a defined benefit system to becoming a hybrid system, it has also become less generous, allowing the funding ratio to recover to 135% in 2006.

Still, few pension funds have formally moved away from the “generous pension promises, which imply that members of a fund that abstain from indexation one year can expect that the fund will restore the real value of their pension payment at a later point in time”.

An additional issue mentioned is older active members of a pension fund may have insufficient time to boost their alternative savings if the fund is unable to restore the real value of the pension.

Thus, the OECD concluded “although substantial progress has been to secure the long-term stability of the pension system, additional adjustments may be required to secure all pension promises”.

OECD Report link

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