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An end to early retirement? A view on recent reform developments in the second pillar of the Dutch Pension System

An end to early retirement? A view on recent reform developments in the second pillar of the Dutch Pension System. Riejanne van der Zanden Budapest, July 5th 2007. A Closer look into the Second Pillar. Fundamentals solidarity within one generation private and quasi-mandatory

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An end to early retirement? A view on recent reform developments in the second pillar of the Dutch Pension System

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  1. An end to early retirement?A view on recent reform developments in the second pillar of the Dutch Pension System Riejanne van der Zanden Budapest, July 5th 2007

  2. A Closer look into the Second Pillar Fundamentals • solidarity within one generation • private and quasi-mandatory • 90% of all employees participate • fully funded through contributions Providers • Pension funds • company-specific • industry-wide • self-employed professionals • insurance providers

  3. A Closer look into the Second Pillar Framework • eligibility at age 21, retirement age 65 • maximum pensionable age = 70 • Aim: 70% of the final/average pay • Accrual rate x salary x pensionable service Categories • Final pay plans / Career average plans / Defined contribution plans • Accrual rate (max 2 -2,25%) or fixed contributions • Backservice / index increases • AOW-franchise (integration 1st pillar)

  4. A Closer look into the Second Pillar Tax legislation • Deferred taxation rules (EET) • Qualifying insurance provider and qualifying pension plan (old age / spouse / orphan / invalidity) • Not qualifying = ordinary taxation (maximum rate: 52%) on the full value of the pension rights • Actuarial recalculation in case of retirement before age 65 • Contributions can be deduced at a higher rate than the benefits are taxed => positive effect of retirement of babyboomers on tax revenues

  5. A Closer look into the Second Pillar Recent Reforms Before: VUT & Pre-pension • Very expensive early retirement system • An offer you couldn’t refuse! • Transferred to capital funded pre-pensions but this was not enough 2005: Early Retirement, Pre-Pension and Life Course Arrangement Act (VPL) • abolishment of all tax relief to pay-as-you-go pre-pension schemes and VUT plans • Introduction of a Life Course Arrangement

  6. A Closer look into the Second Pillar • Targeted age for retirement = 65 • maximum of 100% of the final salary • capital funded pre-pension / bridging schemes => no longer deferred taxation • pay-as-you-go financed pre-pension schemes and VUT plans => double taxation! • transitional measure for employees aged 55 or over on January 1st 2005 (previous rules apply)

  7. A Closer look into the Second Pillar Early retirement will remain possible; financing it has changed! • Compensation through: • the life course arrangement • exploiting the remaining scope in the accrual rate for the old age pension provisions • the AOW-franchise can be lowered • These compensations can still lead to early retirement, albeit with an adjusted lower benefit • Therefore these ways are mainly attractive for people with relatively high wages. • For people with lower wages, early retirement might remain a utopia

  8. Sustainability in the future • As of January 1st 2007: the Pension and Savings Fund Act (PSW) • increase transparency • further guarantees that pensions will actually be paid out • The future: • Change in demographic situation • More change is needed; labour participation of older workers • Still a gap between awareness and willingness; high resistance against pension reforms • Twisted message from the government does not help

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