Going against the investment grain
It is a curious fact that economic prosperity does not correspond with disposable income. Gross national product (GNP) grew 11.5% during the last five years, productivity increased almost 20% and operating profits grew by no less than 72%. But in the same period disposable income fell back 0.5%.
Paul Bernanke, chairman of the Federal Reserve, made this observation in Time Magazine in September 2006. In the US, disposable income has been decreasing for 30 years, and Germany, one of the economic engines of Europe, has seen a decrease for more than 15 years. Sander Boelens and Lies van Rijssen, two Dutch scientists and experienced researchers, have written a book about this curious combination of developments, ‘De armoede van het rijkrekene', and it reads like a wake-up call.
"The Dutch pension system is something to be proud of," they say. "Compared with the rest of Europe, we are in the forefront. But sitting in the first row you run the risk of defending what you have, and in doing so losing your ability to develop further. By focusing on our good system and our achievements we simply forgot to look around, not only at future developments but also at what happens in the European countries around us."
To illustrate this, Sander Boelens mentions an example of a book, written by a DNB director, on the occasion of the introduction of the euro. The author neglected to mention an important reason why a British parliamentary commission rejected the euro. This was a fear of the expected negative effects for the UK funded pension system, which is vulnerable to inflation.
What is remarkable is that the DNB director's book didn't mention the word pension at all. This is very similar to economic handbooks written before the mid 1990s, in which the word ‘pension' was totally absent."
Boelens, a methodologist and historian, says of his book: "Life expectancy of people increases rapidly, stock exchange rates throughout the world develop in a positive way, and based on that we expect the level and quality of our pensions to develop in the same prosperous direction. But at the same time we face a decline of disposable income and decreasing birth rates.
"The inherent problems we face like depopulation, declining social security, economic stagnation and worries about the ability to deal with ageing of society, all are caused because the total of international pension savings is more than can be returned by worldwide investments.
"But at the same time the savings are not high enough to cope with the pension expectations of the coming generations of pensioners. We felt a strong need to investigate these apparent paradoxes.
"We created our present pension system ourselves and together we maintain it and try to keep it up and running as long as possible, without worrying about the consequences. Holland has an open economy. In our small country we host some of the biggest pension funds in the world. There is no country in the world that invests as much as the Netherlands. And still we have a problem.
"The birth-rate will be much too low in relation to older generations of 65 and over. That will prove to be a tremendous problem. To provide all baby boomers with a funded pension, we need twice as much investment possibilities. The UN once calculated that all Europeans will have to work until the age of 75 in order to reach the pension level of 1995 in Europe. That does not seem very realistic and therefore one could doubt the quality of our present lauded system."
Boelens says the core of the problem is that the Dutch system is based on outdated theories. In itself, it is a good system, but the assumptions which led to the present system have changed. The present system is not, as is often maintained, future-proof. We tend to look back at the 1960s and 1970 as decades without environmental problems and with affordable houses for everyone - when the idea of the consumer society was fashionable. Yet Boelens warns against such backward looking. "It seems that policy makers still expect these times to return someday, but we have to be realistic: we are 40 years further. There is no way back."
Today school, study and related activities mean that young people start in paid jobs when they are 25 years old, Boelens points out. The young are prepared to work hard and therefore they want to stop when they are around 60. With rising life expectancy, reaching the age of 85 will not be unusual. This implies implicates a pension period of about 25 years which has to be built up within 35 years. "You don't have to be an academic to calculate that this is impossible. To make things even less realistic, we have raised the pensions as of the nineties. But still, the awareness amongst policy makers is unfortunately underdeveloped."
But there is hope. Boelens expects the Netherlands to emerge from the anticipated problem period with the least problems compared with other European countries. "We have plenty of options because we have saved enormous amounts of money in the past. But if we want to control the greying of society, we have to put these options into effect, preferably at short notice. Awareness is growing internationally that time is running out if we are to prevent the next generation's elderly to go begging."
The main question is, who is going to pay the pensions. Boelens says that it is easy to predict that the younger generations will not be able and willing to pay growing pension premiums in the second pillar next to growing premiums for the first pillar state pension (AOW) and for instance higher costs for cure and care as a result of ageing of society.
One result will be that their disposable income will shrink. On top of that the cost of living, especially of property, has already risen to prohibitive levels. Therefore first time buyers tend to postpone having children, or even decide not to have them, simply because they cannot afford them. "If we don't change course in our country, youngsters will leave," Boelens warns. "We already see that in France. Shrinking younger generations with even fewer children will in the end enlarge the problems I described.
"It is of mutual interest to maintain our pension system, but a necessary condition is another way of thinking. Looking at future developments we have to invent realistic solutions which are not based on the past. That's new and feels uncomfortable for the pensions world. Besides that we shall have to be prepared to learn from other countries, especially their ability to tackle ageing problems,"
Boelens points out that the economic and demographic cycle in the Netherlands has been completely disrupted, and needs to be restored as a first step. Pension savings and investments on an individual basis are not sufficient to meet the demands of an ageing population. Yet collective savings are too high. In Boelens' opinion the solution lies in a system with more focus on pay-as-you-go and less funded.
"Pension funds should invest less instead of more money. Too much money is now extracted from consumption, with all economic consequences. In doing so, pension funds could do with a lower coverage ratio. If for instance the coverage ratio would decrease with 2.5% yearly, lots of problems could be solved.
"Pensions could be paid, but also a more honest remuneration of younger generations could be arranged. Part of the capital that becomes available could be invested in solving ageing problems. That is in the interest of employers, employees, pension funds, younger and older generations. Then the cycle finds its new balance."
‘De armoede van het rijkrekene' is published by Papieren Tijger price €20