Going Dutch

I just finished reading an article by Mary Williams Walsh entitled No Smoke, No Mirrors:  The Dutch Pension Plan.  It was an interesting read on how pensions are funded in the Netherlands, and how that approach has led to more stability of their pension system.  Not only are they more stable than in the United States, but they are more prevalent; nearly 90% of Dutch workers receive a pension (compared to only 14% of private sector employees in America), in plans designed to provide about 70% of their lifetime average pay.

There are several comparisons that highlight the difference between the Dutch model of pension systems and the typical American model.  The fundamental difference is that theirs is a “pay as you go” model, where each generation of workers pays its own costs.  Their pensions are required to be funded with $1.05 in current assets for every $1.00 of current obligations.  In contrast, the average American pension plan holds $0.67 in current assets for every $1.00 of current obligations.  Iowa’s main plans fare a little better – as of July 2013, IPERS, which the majority of statewide public employees are on, was funded at $0.81 in current assets for every $1.00 of current obligations, while MFPRSI (the retirement system for our police and firefighters) was funded at $0.74 in current assets for the same time-frame.

The Dutch model is designed to adjust to market corrections more quickly.  Typically, the system is designed to require that any shortfall below the $1.05 asset to $1.00 obligation ratio must be eliminated in 3 years.  The 2008 market correction was an exception for the Netherlands.  At that time, the Dutch system went from a ratio of $1.45 of assets to ever $1.00 owed to only $0.90, and the central bank allowed them a longer, 5 year time-frame to replenish their funds to the mandatory $1.05 ratio.  The typical American plan, in comparison, allows their plans 30 years to recover from losses, a period of time that is a recipe for pushing current shortfalls on to a future generation of society.  The ability to push losses for such a long period of time has led to tremendous problems across America over the past few years.  Detroit had a $3.5 billion shortfall when they entered bankruptcy protection last year, while Stockton, CA had a $1.6 billion shortfall that went unrecognized until their deficit was recalculated as a part of their bankruptcy process.

Funding pension plans is radically different in the Netherlands as well.  Dutch employees contribute 18% of their pay in pension plans, while Americans typically place 16.4% in pensions (with 6.2% of this amount typically going into Social Security).  Dutch employers contribute to the plans, but their payments are capped at levels lower than typical American plans and they receive no calls to suddenly increase their funding, threatening their viability (which can lead to bankruptcy).  Dutch employers, also, have no ability to tap into pension funds for other needs, which solidifies their plans as well.

A final note I garnered in the comparison was that the Dutch pension plans use a much more conservative growth model, comparable to the rate of return of bonds or Treasuries, rather than the typical American model based on higher market gains that lowers current pension costs while pushing the risk of losses to future generations.

The Netherlands have developed a vibrant pension system that we could learn a tremendous amount from in the United States.  The Netherland is one of 3 countries to earn a grade of B+ or greater on the Melbourne Mercer Global Pension Index.  America, in comparison, was given an overall grade of C.  As we discuss pensions at a more local level, making a larger overall comparison of the health of our system compared to what has been accomplished internationally has a significant value.  Our Iowa pension systems, when compared to those we see in the news in Illinois, are comparatively healthy.  When we take a look at what has been accomplished on a larger scale, though, we can see where we are performing at more of an average level.