In its report ‘Ageing and the Sustainability of Dutch Public Finances’, the national Bureau for Economic Policy Analysis, or CPB, concluded that the ageing of the Dutch population will lead to an increasing financial burden.

The CPB forecasts that the ‘grey pressure’ - the number of over 65s divided by the number of people between 20 and 64 - will almost double to over 43% in 2040.

Other than increasing general taxation and cutting spending, the CPB suggests either raising the official retirement age of 65 or taxing AOW contributions. The government could also pass on the financial burden of ageing to future generations, the CPB says.

The retirement age should be raised by one year in 2015, and by another year in 2025, the CPB suggests. Moreover, the state pension should be taxed. “By cutting more on expenses now, future generations need to economise less. On balance, all generations will be evenly affected,” the CPB argues.

The CPB says the prognosis for public finances has deteriorated since 2000. Among the causes are the decrease of interest rates, the forecast returns of pension funds, and the negative effect of the fall in equity prices between 2000 and 2003 on pension assets, it says.

The Social and Economic Council (SER) the leading governmental and parliamentary advisory body, has backed the CPB’s analysis. It has concluded that an increase of labour participation could halve the costs of ageing. Half the costs could be met by taxing pensioners with a generous additional pension, it said in an advisory report.

Meanwhile, the Dutch Labour Party (PvdA), has launched a proposal to tax additional pensions as a contribution to the AOW. After meeting fierce and widespread public criticism, the party has now watered down its original proposal.

Under the PvdA’s new proposal, people over 65 would pay tax on the amount of their additional pension over e15,000 (rather than the threshold of e10,000 the PvdA formerly proposed). The PvdA says the tax should be introduced in 2011, and should rise by four annual steps of 0.6% to 2.4%.

The ABP, unusually, has entered the debate by publishing a position paper, in which it counters the CPB’s recommendations. “Ageing is no longer a danger to the Dutch pension system,” it says. “Returns, like the shift from final to average salary schemes and a flexible retirement age, have led to an ageing-resistant system.”

“The present pension provision of e625bn is sufficient for honouring the present pension promises, without an increase of taxes or pension contributions. No large-scale changes of the pension system are needed, ” the paper says.

In ABP’s opinion the real challenge is individualisation - suiting pensions to individual needs - and the need for more choice within its collective schemes.

ABP points out that ageing-related expenses and income in the national budget are balanced in the NPB’s calculations. “The pressure on national finances will mainly be caused by shrinking gas reserves and a steep rise in healthcare expenses. Therefore, it will be more logical to change the financial structure of the care sector, and to invest gas proceeds for future generations,” it notes.

ABP also criticises the CPB’s decision to base its survey on an interest rate of 3%. “One percent more will decrease the necessary cuts to merely 0.6% instead of 2.6%,” it says. Alternatively, a balanced budget can also be reached by cutting 0.5% every four years until 2040, it suggests.

Analysing the CPB’s calculations, ABP argues that a cap on the tax-free build-up of pensions will have a negative effect on economic growth and employment. If employees cannot build up a collective pension for a part of their income, one million employees in total will suffer, it says.

ABP contends that an increasing life expectancy is, from a financial perspective, no reason for an increase in the retirement age. “Pension funds have already negotiated in their contributions that their participants will be living longer. In line with the rules of the new financial assessment framework nFTK, we have already accounted for a rise of the life-expectancy of a 65 year old man by two years, and a 65 year old woman by one year until 2050,” it says.

Others agree. “Ageing is a false problem,” the former social affairs’ minister Bert de Vries argues in an article in the journal of the Dutch Association of Industry-wide Pension Funds (VB). “The future tax revenues from pensioners will be sufficient for financing the extra demand for AOW.”

Referring to CPB figures, he says: ” In 2035, the expenses as a percentage of the BNP will have risen by 4%. But during the same period, the tax gains from additional pensions will have increased by 5%. The number of people with only AOW, or a small additional pension, will have dropped, whilst more people will receive a robust additional pension.” The CPB has responded to ABP’s criticism by saying that policymakers need to look at the bigger picture. “For the sustainability of the governments’ finances, it is the overall picture that matters, not just pensions,” Although the CPB has admitted that an estimate of interest rates is difficult, it has held to its initial view.

The three leading political parties have not subscribed to ABP’s view. They argue that even if the pension system is ‘ageing-resistant’, this will not by itself remove the financial consequences of an ageing population. “We consider it as an overall problem,” the PvdA MP Ferd Crone has commented. ABP’s arguments will not change his party’s plan to tax the elderly for the AOW, and limit the tax-free part of pension contributions, he says.

Some suggest that ABP’s motives in attempting to defuse the ageing debate may not have been wholly altruistic. The daily newspaper Het Financieele Dagblad, for example, has suggested that ABP’s initiative may have been driven by a fear of losing custom. The PvdA has repeatedly said that it wants to cut the tax benefits on collective pension contributions for employees with an income of over e45,000.

Moreover, the CDA wants to extend the ‘levensloop’ or life-course scheme - until now a tax-friendly saving scheme for unpaid leave, including early retirement - to a wider income insurance. Yet pension funds are allowed to offer levensloop products only via strictly separated subsidiary companies.

Whether or not the suggestion of special pleading is justified, ABP has at least thrown down a challenge to those who say that there is no alternative to later retirement or taxing state pensions.

 

Where do the political parties stand on ageing and its financial effects?

The main opposition party, the Labour Party (PvdA), wants pensioners to be taxed on their pensions from 2011. People aged 65 with an additional pension will have to pay 0.6% on anything over €15,000.

The main government party, the Christian Democrats (CDA), opposes the taxation of pensioners. It favours ‘increased labour participation’. The CDA lost an election in the 1990s, partly because of its proposal to cut AOW benefits.

The CDA’s coalition partner, the Liberal Party (VVD), also opposes the taxation of pensioners. The VVD wants to keep the official retirement age at 65.

Finance minister, Gerrit Zalm, a member of VVD, has suggested that extra tax revenues from the new generation of pensioners probably will not be enough to compensate for the extra expenditure by the state on old age pensions and healthcare