Holland's aging population and how our pension is under pressure

The pension system as a shaky house of cards

Imagine a house of cards, carefully constructed over generations. Each card represents a working Dutchman, whose contributions keep the house solid. But what happens when the base gets smaller and smaller, while the upper layers keep growing? The house of cards totters. This is exactly what is going on with our pension system. The Netherlands is aging rapidly. More and more people are reaching retirement age, while the number of people in work is becoming relatively smaller. This creates a challenging balance in a system that leans on intergenerational solidarity.

The pension system now works so that young people make contributions with which older people receive their pensions. But with rising gray pressure - the number of retired versus working people - it is becoming increasingly difficult to keep this model afloat. The question is: how long can we keep this house of cards stable without fundamental changes?

The numbers behind the challenge

To better understand the challenge, let's look at the numbers:

• By 2024, the Netherlands will have more than 3.67 million people over 65, or 20.5% of the population.
• The gray pressure - the number of retirees relative to 20-64-year-olds - is now 34.9%, up from previous years.
• Projections show that around 2040 about a quarter of the population will be 65-plus.
• By 2050, the gray pressure is running toward 44%, meaning that for every retiree, there will be only slightly more than two people working.

In addition, it appears that about 765,000 employees have no pension plan through their employer, meaning that after retirement they are entirely dependent on the state pension or individual savings pots. Among the self-employed, the situation is even more dire: only 24% accrue a substantial pension. This means that for a large group of people, the risk of a pension gap increases, potentially resulting in financial insecurity later in life.

Legislation and policies

The Dutch government has already implemented some reforms to address retirement challenges. The Future Pensions Act (WTP), which took effect July 1, 2023, aims to create a more flexible and personalized pension system. The key points of this law are:

• Moving to a contributory rather than a benefit plan, making pensions less dependent on interest rates and more responsive to individual choices.
• Personal pension pots: Each employee is given insight into his or her own saved retirement assets.
• More accessible schemes for the self-employed: Self-employed will have more opportunities to build tax-advantaged pensions.
• Change in survivor's pension: The new system will make survivor's pensions simpler and more transparent.

These reforms are an important step, but the question remains whether they are sufficient to deal with the growing pressure on the pension system.

Case studies: What does this mean for you?

To make the impact of aging and the new pension law tangible, we look at three fictional Dutch people:

• Emma (age 25, entry-level salaried employee): Thanks to the WTP, she gets a personal pension pot, which gives her more insight into her accumulated assets and allows her to respond more flexibly to changes in her career.
• Mark (age 40, self-employed): He has hardly built up any pension yet, but the improved self-employment schemes mean he can now start making tax-advantaged contributions.
• Hans (age 60, nearing retirement): Hans notices that his pension is less guaranteed than for older generations, but he benefits from the new choices in investment options within his pension fund.

While these changes make retirement planning more personal and transparent, they also require individuals to better understand their options.

International comparison: how are other countries doing?

The Netherlands is known for a strong pension system, but other countries offer interesting lessons:

• Denmark: Moved early on to an individual pension system with collective elements, making for a stable and flexible system.
• Sweden: A system in which pension politics is largely depoliticized. Pensions automatically adjust to economic developments, requiring less political interference.
• Germany: struggling with challenges because many working people have no supplementary pension. Reforms such as an equity fund are being considered to strengthen the system.
• United States: Many Americans do not accrue pensions through employers. Initiatives such as auto-enrollment are trying to improve this, inspired by the British system that has doubled pension accrual in the private sector.

Possible solutions

What can we do to reduce the pressure on our pension system? Here are some concrete solutions:

1. Linking retirement age to life expectancy
   • The Netherlands already does this in part, but could make it even more flexible, as in Sweden.
2. More opportunities for individual pension management
   • Through digitization and AI, personalized retirement plans can be better tailored to individual needs.
3. Encourage broader retirement awareness and participation
   • More mandatory accrual for self-employed and flex workers could help close pension gaps.
4. Sustainable investing to increase returns
   • Pension funds can benefit from sustainable investments that provide long-term stable returns.
5. Better communication about retirement choices
   • Employers and pension funds can use digital tools to help employees better understand their future financial situation.

So what's the bottom line?

An aging population poses major challenges to our pension system, but with timely reforms and innovative solutions, we can future-proof the system. The Future Pensions Act is a step in the right direction, but more is needed to close the growing pension gaps and give younger generations confidence in their financial future.

Core of the problem: Aging creates an increasingly smaller group of working people per retiree.

Key figures: Gray pressure rises to 44% by 2050, and 765,000 workers do not build a pension.

Main solutions:

• More flexibility in retirement age
• Broader retirement awareness
• Better communication and personalized pension management

If there is one thing we want to take away from this blog, it is this: check your pension via MijnPensioenoverzicht.nl, discuss your accrual with your employer and consider additional options such as investing. The earlier you have insight, the better you can plan your financial future. The house of cards can stand, but we need to strengthen the foundation before the wind blows it down.