Aging

Harrie Verbon:
Lower incomes fall foul of pension agreement

The new pension agreement states that a greater proportion of participants will have to bear the risk in the form of a reduction in entitlements. This rules out adjustments to pension contributions. This measure may amplify perverse redistribution from low to high incomes and limit the desirable redistribution between generations, warns Professor of Public Finance Harrie Verbon. He advocates a national pension scheme.

The Dutch pension system is characterized by a high degree of redistribution, both through supplementary pensions and through the state pension. Redistribution between generations is desirable because it means resources flow from rich to poor generations. Generations of future workers will be rich because they are in short supply and will therefore be paid high wages. But without further action, pensioners in the future will be less well-off due to the slump in the stock market, which could well persist for another two decades. Pension fund redistribution within generations is not desirable, as it will result in redistribution from low incomes to high incomes.

Professor Verbon argues that raising the retirement age will have a negative impact on lower incomes in terms of pension funds, while benefiting higher incomes. Even the limited increase in state pensions is primarily of benefit to higher incomes. One reason why using premiums as an instrument for redistribution has fallen out of favor is the fact that businesses or business sectors with many older participants in the pension fund will find themselves at a competitive disadvantage relative to ‘younger’ companies.

A national pension system, regulated by the government, can fix this and ensure that desirable forms of redistribution and more systematically determined at national level.

This is a summary of a presentation given by Harrie Verbon at a public meeting entitled Tilburg Pensioenstad (Tilburg Pension City) on 8 July 2011.