A pension for all citizens aged over 65 was introduced in the Netherlands in 1947 by a social democrat minister. The flat rate, tax-funded pension, called the AOW (Algemene Ouderdomswet) is payable in full at pension age to all individuals with 50 years residence, pro rata for those with fewer years. The AOW goes a long way to compensate women (and men) for time spent in unpaid caring work (JustLanded).
The amount of AOW is linked to the Minimum Wage (MW). An individual over 65 living alone receives 70% of the net MW, while each of a couple aged over 65 living together receives 50% of MW. The single AOW in 2015 (€1114 per month or £188 per week*) is considerably more generous than the full basic pension in the UK (£116 per week).
Most people who live or work in the Netherlands are automatically insured under the AOW scheme, irrespective of nationality, building rights at 2% pa for the full AOW. However, individuals insured for under 1 year (and born after April 1950) receive no AOW. The Dutch administrative authorities keep long-term records of everyone’s address, employment, tax and National Insurance (NI).
To fund the AOW, Dutch tax and NI are somewhat higher than in UK. Dutch combined tax and NI rates for earned income are 34% (€0 – €20,000 pa) 42% (€20,000 – €58,000 pa) and 52% (over €59,000 pa) (CFE). These compare with UK combined rate of 32% for low to average earnings, 42% (earnings over £42,385 pa) and 47% (over £150,000 pa.) However Dutch Personal Tax Allowances only apply to certain groups such as parents with children.
The AOW is usually supplemented by a private occupational pension funded from employees’ contributions. Often these funds are grouped by industry, providing economies of scale and spreading risk more effectively than the thousands of workplace schemes in the UK. However, in the 2008/2009 credit crunch Dutch funds lost considerable sums and many fell below the level necessary to cover liabilities.
About 50% of the money paid out as Dutch pensions is from the state’s AOW, 45% from private pension funds. The remaining five percent are individual private pensions, which have grown recently in anticipation of cuts to the AOW, as public spending is reduced. This mix of sources reflects the wider OECD trend towards private pensions replacing state provision: in 1980, the proportion of pension income from the AOW was 85% (Bosch-Supran 2004).
The Dutch mandatory retirement age (and state pension age) increases to age 66 in 2018 and age 67 in 2021. The equivalent dates for UK are 2020 and 2028. These changes save (or delay) pensions paid out and may prolong taxable employment. Another measure being considered in the Netherlands is to increase taxation of pensioners; this could also occur in the UK if tax and NI are merged.
Other countries with a Citizen’s Pension include Denmark and New Zealand. The differences between Dutch and Danish pensions are discussed by Frericks et al. (2006).
The Dutch Citizen’s Pension is not only workable, but is successful and popular. It gives a secure basic income at a level that is generous relative to the UK’s basic pension to all long-term residents in later life. It contributes to the achievement of a pensioner poverty rate that is one of the lowest in the EU at about 7% for both men and women.
Frericks et al. (2006) ‘Shifting the pension mix: consequences for Dutch and Danish women’, Social Policy and Administration, 40, 5 (2006): 475-492.
Bösch-Supran, A. (2004), Mind the Gap: The Effectiveness of Incentives to Boost Retirement Saving in Europe, Discussion Paper no. 52-04, Mannheim: Research Institute for the Economics of Aging.
Confederation Fiscale Europeene (CFE), www.cfe-eutax.org/taxation/personal-income-tax/netherlands [accessed Sept 2015]