Saturday, April 17, 2010

Tinkering with the AOW

pension The Dutch Pension System is a three-legged stool, made up of the tax-supported Old Age Pension (the AOW), the employer’s  pension plan, and private insurance savings.  This is somewhat parallel to the American system of Social Security, employer’s defined benefit plans, and personal IRA/Roth savings plans.   The AOW guarantees 70% of the minimum wage, currently paying around 1000 euro per month per person.

All workers vest 100% into the AOW program over 35 years, so each gains a 2% payout for each year worked.  Thus, an expat working in the Netherlands for five years would build up a stake of 5x2%=10% of the minimum wage, or around 100 euros per month.  Not huge, but an extra 1200 euros per year for life, indexed to the minimum wage, isn’t something to overlook.

These benefits may be limited based on the country of residence after retirement.  Those in the United States are currently eligible, but it’s best to check the Sociale Verzekeringsbank (SVB) website for details.

As with many western countries, the Dutch government is proposing to gradually raise the retirement age from 65 to 67.  This has prompted some interesting suggestions from the head of the Dutch FNV labor union, Peter Gortzak.  He argues that a more flexible AOW is needed, one that allows workers in physically demanding jobs to retire earlier, while those wishing to continue working past retirement age have encouragement to defer their pension (with the possibility of a higher monthly payout). He suggests introducing a fixed period of benefits, in which a minimum retirement age is calculated back 20 years from the mean life expectancy in that job.

It’s an interesting idea, recently repeated in the Economist, and a good example of the out-of-the-box thinking that I think the Dutch do so well on social issues.  It’s also good cappuccino-chatter for sitting out with friends on warm spring days.

I like the ideas of giving workers a flexible choice of when to stop, incentives to keep willing people engaged with work,  and protections to keep older workers out of physically demanding jobs.  Life expectancy is a good way of defining a flexible threshold: transparent, adaptable, and understandable.  It has the additional social benefit of highlighting the hazards of some jobs and motivating technical and workplace changes. 

I’m not as happy with the idea of a fixed 20 year payout term; I would feel like I would keep working out of fear of what might happen when I’m 90.  Instead, I’d rather see a fixed total sum payout with larger checks resulting from each year that I defer retirement, without limit.

As a sideline, the same Economist article notes the increasing concern that older retirees will simply outvote younger workers to increase their benefits in the future.  To counter that, Arji Lans Bovenberg (Tilburg University) suggests that parents be given an extra vote for each of their children?

  P.S:  A US friend, recently retired, tells me that there are offsets and taxes to prevent double dipping among national insurance pools, effectively keeping him from claiming the Dutch pension.  Again, check the rules.

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