Considerable variation in pension accrual by Dutch households
This Netspar Brief is concerned with the amount of pension entitlement being accrued by Dutch households and the relationship between this amount and the households’ pension ambitions. Our findings are based on extensive empirical research which examines all sources which can influence the financial position of retirees. We also examine the degree to which Dutch pensions provide an adequate standard of living compared to those paid in other countries. An understanding of the adequacy of pensions is important when making choices about the pensions system of the future. This brief therefore contributes to the ongoing dialogue about pensions in the Netherlands.
The most important conclusions
- Overall, Dutch households accrue a good pension. If we consider only the state retirement pension (AOW) and supplementary pension, the average householder aged between 35 and 64 is expected to accrue a gross (before tax) pension equivalent to 71% of current income, or a net (after tax) pension equivalent to 84% of current income. If we also take free savings and the value of property into account, the average net replacement rate is actually 101%. In practice, the accrual amount is slightly lower due to the application of tax allowances under the ‘Witteveen Rule’, but this is partly compensated by the fact that people now tend to work for longer, thus deferring retirement and pension eligibility.
- There are significant variations in pension accrual and hence final entitlement. Approximately 30% of households will eventually receive a pension of less than 70% of their current income. Approximately 20% of these people will fail to achieve the minimum consumption requirement that they have set for themselves. Some groups, such as the self-employed and divorcees, are more likely to have an inadequate pension entitlement. Those in the higher income brackets are also likely to see a significant percentage decrease in their income on retirement.
- There are also some people who save or invest a particularly large amount. Over 25% of households can look forward to a net income after retirement which is at least as high as before. Among this group, approximately half have a retirement income which is 18% higher than they actually need, according to their own assessment. This may indicate suboptimal distribution of consumption throughout the life career; they may have been better off had they saved somewhat less for their retirement and kept more money for personal spending during their working life.
- Pension results in the Netherlands are, and will remain, relatively high compared to those in countries such as France, the United States and Norway, according to an international comparison based on information about individual savings and investments.
- We therefore see significant variation between certain groups in terms of pension accrual, as well as in individual wishes and requirements with regard to pension results. This suggests that greater flexibility and customization is required. A transition to a system based entirely on personal savings and investment accounts, as is soon to be studied in greater detail by the Social and Economic Council of the Netherlands (SER), will provide greater opportunity in this regard. However, it will be essential to introduce an appropriate framework of options which prevents people from making poor choices and thus failing to accrue an adequate pension.