TCS Daily


The Pension Generation

By Joshua Livestro - October 13, 2005 12:00 AM

A European pensions expert was once asked whether he thought Europeans would ever be willing to transform their expensive tax-funded systems into more sustainable fully funded systems. His answer: "Not until the young take up arms against the old."

In The Netherlands, that is exactly what is happening right now. In July of this year, a group of young civil servants took the dramatic step of publicly declaring their opposition to a deal safeguarding the early retirement rights of older workers. Since then, the Dutch airwaves and op-ed pages have been filled with bitter intergenerational recriminations. The main Dutch trade union, the FNV, accused the authors of "corroding the cement of society by only showing solidarity when it's convenient to them." The young pension refuseniks in turn accused the unions of "hiding behind a mask of altruism while blatantly serving the narrow interests of its own, ageing membership." Where, they asked, is the solidarity in a deal that sees younger workers pay twice, once for their own retirement, and once for the early retirement of older workers, while older workers aren't expected to make any sacrifices at all?

To understand exactly what these young civil servants are objecting to, it helps to know the history of the Dutch pension system. The Dutch made the switch to a largely funded system nearly 50 years ago. The launch of a number of early retirement schemes in the 1980s, however, reintroduced an element of unfunded liability back into the system. The early retirement option proved so popular that it left the Dutch Treasury facing a potential double whammy: a mass exodus of older workers meant falling income tax revenues, as well as rising early retirement expenditure. Something had to be done. In the late 1990s, government, employers and unions agreed to make the switch from an unfunded to a fully funded early retirement scheme. In 2003, the new centre-right government decided to revisit this deal. Its proposal to speed up the closure of all existing unfunded schemes was met with fierce opposition from the unions, whose older members were angry about the prospect of losing their cozy early retirement arrangements.

In the end, the government caved in to union pressure. A deal was brokered, covering all public sector workers, in which the government abandoned its plans to speed up the phasing-out of early retirement schemes by agreeing to their continued existence until 2023. The new package contained one major change compared to the measures adopted in the 1990s. Instead of starting with a high extra tax contribution from all workers, and allowing the tax part of pension contributions to taper off as the number of early retirement claims dwindled, the new measure proposed a slightly lower flat-rate tax contribution for the entire transition period.

It was this change that sparked the revolt by the young civil servants. They argued, quite plausibly, that it went against the spirit of the intergenerational contract that serves to uphold the entire pensions system. Under the old arrangement, all generations were asked to make a significant initial contribution to solving the funding problem. Once the main challenge of the early retirement of the first age cohorts of the baby boom generation was met, younger workers would start to see the tax component of their pension contribution reduce sharply, leaving more money to be paid into their own retirement funds. Put simply: under the old arrangement, every generation made a significant contribution, and all stood to profit in one way (early retirement) or another (eventual higher tax-free contributions to own pension fund). Under the new arrangement, the pain of paying for the unfunded early retirement liabilities was switched from the old to the young. After all, if the older generations are asked to pay less, another generation will have to foot the bill. That generation is the under-35s. Calculations by the main Dutch civil service pension fund, the Algemeen Burgerlijk Pensioenfonds, showed that under the new arrangement, the under-35s would be paying eight times as much towards the total costs of switching as the over-55s. Not only would they be paying more towards the continued existence of the early retirement scheme than any other age cohort, they would also be the only ones not to profit from it.

In their open letter, the young civil servants initially objected only to the fact that their generation was asked to bear the brunt of the transition costs. Their protests were aimed at the reform of the system, not at the system as such. All they wanted was a fair deal. Since then, however, the parameters of the debate have shifted dramatically. Many now openly question the very idea of intergenerational solidarity itself. The prominent Dutch economist Lans Bovenberg asked why, in union statements about the issue, solidarity was always self-evidently presented as meaning the young showing solidarity with the old. Why not the other way round? Why not ask the over-55s to make a sacrifice for the sake of the under-35s by making them work longer before retirement?

Interestingly enough, one organization that seems to have taken Bovenberg's comments to heart is the FNV union. It recently announced a change to its pension scheme. Effective immediately, it would abolish the existing early retirement scheme by raising the standard retirement age from 60 to 62. The reason? "The existing scheme didn't provide sufficient funds to finance the early retirement of all older FNV-workers," a spokesman for the union stated in the Dutch daily de Volkskrant. "We just don't have enough money in the bank. And the last thing we want is an intergenerational battle like the one currently raging in the public sector."

Quite right. On pensions, at least, the union's message is clear: do as we say, not as we do.


 

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