As reported by Statistics Netherlands today, state pension or AOW entitlement nearly doubled between 2008 and 2014, exceeding entitlement to supplementary employees’ pension schemes by far. By 1 January 2014, total entitlement to the AOW state pension reached 1,356 billion euros, an amount equivalent to 208 percent of the Dutch GDP, which is the total value of goods and services produced in the Netherlands in a year. On that same date, entitlement to supplementary pension schemes for employees reached an equivalent of 157 percent of Dutch GDP.
AOW entitlement refers to the reserves which would be needed to meet existing pension liabilities, if the state pension was financed in the same way as the supplementary pension. Statistics Netherlands has calculated this figure for the first time, in line with international agreements.
Substantial increase in entitlementEntitlement to state pensions (AOW) and the supplementary employees’ pensions have both seen a rapid rise in recent years. In 2008, AOW entitlement stood at 797 billion euros. The sharp rise is not merely caused by the ageing population but mainly by low interest rates. These result in lower returns on accrued reserves, requiring higher reserves.
Income from AOW contributions only covers two thirds of allowance claims
In reality, reserves are only accrued for the supplementary pensions. AOW is being financed from current assets, which are primarily derived from the AOW contributions paid by all tax payers below retirement age. However, these contributions are increasingly falling short. In 2014, income from these contributions (23 billion) covered merely two thirds of the AOW allowances (34 billion). This is mainly due to the increased AOW entitlement of an ageing population, and the fact that the AOW contribution amount is bound to a maximum by law. The deficit is being supplemented by the government from general expenditure, to which all tax payers contribute.
Many countries have lower pension reserves
Another report published by Statistics Netherlands today shows that most countries’ reserves for old age pensions are far lower than in the Netherlands. Many countries build up far lower reserves for the state pension and supplementary pension, if any. These countries face much higher current costs to pay existing pension benefits. Pension benefits are also much lower relative to salaries earned than in the Netherlands.