What Happened?
The Dutch pension system is built around honest reporting of liabilities and each generation paying its own costs. Employees in the Netherlands immediately implemented higher individual contributions and cut benefits for workers in the wake of the 2008 economic crisis to build back retirement systems.
Goal
The Dutch pension system focuses on the present costs of benefits and retirement, expecting current employees and governments to pay for these liabilities now rather than push them off into the future. The Dutch imposed a scrupulous method for measuring the value of all pensions due in the future by pricing them the same way you would safe bonds like Treasuries. This creates a more stable lifelong benefit that is more expensive to fund.
In the United States, however, the measurement method enables strong market gains to lower the cost of benefits, while pushing the risk of losses in the future. The Dutch central bank prohibited this form of measurement, The New York Times reported.
The Netherlands, therefore, have no cities going bankrupt due to inflated pension costs or states struggling to contain a growing number of unfunded liabilities – as is seen in the United States. In fact, public funds in the U.S. hold 67 cents for every dollar owed to current and future pensioners, The New York Times reported.
By comparison, 90 percent of Dutch workers earn pensions at their jobs, with benefits amounting to an average of 70 percent of their lifetime average pay. Dutch workers achieve this financial stability by allocating nearly 18 percent of their pay into professionally run pension funds, compared to 16.4 percent on average in the United States, The New York Times reported.
Dutch employers also contribute to the pension system, which encourages companies to maintain systems despite economic downturns. In addition, Dutch pension funds cannot be touched by employers if they generate a surplus. Dutch employers pool pension plans by sector and rely on nonprofit firms to invest the money responsibly.
In fact, in 2002 the Dutch central bank required pension funds to keep at least $1.05 on hand for every dollar they would owe in future benefits to prevent escalated unfunded liabilities. If the pension system ever dropped below the requirement, it has three years to recover, The New York Times reported.
Solving the Problem
The International Centre for Pension Management recently looked at the state of American public-sector pension plans and analyzed possible reform strategies to sustain pension systems. The report found two measures could effectively change the trend of underfunding state and local pension systems:
- Quicker recognition of the amortization burden in the contribution rate
- Mitigation of inflation indexation by rule or relating indexation to the funding ratio
Both solutions, however, lead to high transfers of value from current to future taxpayers.
In addition, the centre outlined some key principles to consider when designing and maintaining an effective, stable pension system. Characteristics to consider include:
- Adaptability to weather economic fluctuations
- Objectivity to make beneficiaries comfortable with the system
- Prepare the pension system with worst case scenarios in mind so risks are factored in
The report recommends pension funds should prevent any one group of participants from benefitting at the cost of another group, and sharing diversifiable risks to reduce individual risk.
Reforming Pensions
Gov1 has kept close watch on state and local pension reforms as well as talks between employers and unions on benefits.