December 2, 2013

An Assessment of Alternatives for the Dutch First Pension Pillar, The Design of Pension Schemes

The ageing of the Dutch population, resulting in an increase in the number of retirees relative to the working population, has induced a debate about the sustainability of the Dutch first pillar pension scheme (AOW). The system is financed as a pay-as-you-go system. This paper explores possible alternatives for the AOW.

It does so by setting up a stochastic partial equilibrium model to study intragenerational insurance, which inlcudes longevity and productivity risk. The model shows the welfare, labour-market, saving and unintended-bequest effects of a shift from a Beveridge towards a Bismarck system in which pension rights depend on labour-market history. The main conclusion is that a shift of the first pillar pensions from a Beveridge towards a Bismarck system is not necessarily welfare improving from an ex-ante insurance perspective, i.e. before the veil of ignorance is lifted. Moreover, a means test of the first pillar against wealth income, which implies a lower AOW when an individual has wealth income and a lower pension premium for everyone, does not improve welfare in the setting of the model considered in this paper.