Behind every number is a story. In the series Numbers That Matter, we spotlight a single figure that sheds light on pensions, APG, or the world around us. In this edition, we turn to the Dutch state pension (AOW). Today, there are three workers for every AOW recipient in the Netherlands. What does this mean for the long‑term sustainability of the AOW system? We put the question to Morteza Mohseni, actuary at APG.
In 1950, there were seven workers for every retiree. Today, the figure is just over three. What is the first thing that comes to mind when you see that number?
“The ratio above all points to population aging. As actuaries, our work mainly focuses on second‑pillar pensions, the occupational pensions people build up through their employer. In that context, we look at how much pension contribution is needed today to be able to pay out pensions for life in the future. For this so‑called funded system in the second pillar, the fact that there are now just over three workers per retiree is less relevant. Each pension fund participant builds up their own pension capital. That is even more true under the reformed pension system, with its individual pension pots. From an actuarial perspective, developments in life expectancy are far more important. Incidentally, rising life expectancy is one of the drivers behind population aging.
The worker‑to‑retiree ratio does, however, have direct consequences for the affordability of the AOW. The AOW is financed on a pay‑as‑you‑go basis: the contributions paid by today’s workers are used to fund the benefits of today’s retirees, supplemented by general tax revenues when needed. This makes the AOW a system that relies heavily on intergenerational solidarity. Everyone who contributes to the AOW today hopes to receive this basic state pension themselves in the future. A declining number of workers per retiree puts pressure on the system’s financial capacity and long‑term sustainability.”
The new government wants the AOW retirement age to rise by one year for every year that life expectancy increases. The reason given is that AOW contributions now cover less than half of total AOW spending, meaning the system increasingly depends on tax revenues. Is a one‑to‑one link with life expectancy the only lever policymakers have?
“No, linking the AOW retirement age one‑to‑one to life expectancy is primarily a political choice, and certainly not the only policy option. There are alternatives that could either increase AOW contribution revenues or reduce AOW expenditures. For example, the AOW contribution rate could be raised, or a larger share could be financed through general tax revenues. Higher labor productivity could also help, at least in part, through innovation or the use of AI. Targeted labor migration is another option, particularly in sectors that currently face labor shortages, such as healthcare. After all, labor migrants also pay AOW contributions, which supports the system’s affordability. Encouraging full‑time employment is another avenue. The Netherlands is known for its high rate of part‑time work, so there is still room for gains there as well.
There are also policy options that are more politically sensitive, such as making the AOW partially income‑dependent or no longer automatically indexing it to inflation. Another possibility is to make the AOW more flexible, for example when it comes to the start date. Imagine being able to choose to draw your AOW earlier because you have already built up a solid occupational pension. In that case, you might be willing to accept a lower AOW benefit than you would normally be entitled to. In short, a one‑to‑one link is one option, but certainly not the only one.”
The AOW is often seen as a hard‑won social achievement, and many older people in the Netherlands depend on it at least in part. What do you see as a common misconception about the state pension?
“A persistent misconception is that the AOW is a form of personal pension savings, comparable to an occupational pension in the second pillar. In addition, the debate about whether the AOW retirement age should rise one‑to‑one with life expectancy may obscure the fact that the AOW age has already increased substantially, and that this process is continuing. The step from 67 to 67 years and three months already sparked considerable public debate at the time. Under current rules, each additional year of life expectancy leads to an eight‑month increase in the AOW retirement age. I doubt that every 40‑year‑old realizes that their expected AOW age is now approaching 70, and that they will therefore almost certainly have to work well beyond 67.”
Finally, projections suggest that by around 2040, the number of workers per AOW recipient will have fallen to roughly two. Can anything be said about the longer term?
“That remains uncertain and largely depends on the population structure the Netherlands will have by then. Most scenarios assume that population aging will continue to some extent, causing the number of workers per AOW recipient to decline further. The extent to which this actually happens depends, among other things, on migration, particularly labor migration, developments in the labor market, and life expectancy.
Incidentally, the worker‑to‑AOW‑recipient ratio is not only relevant for the sustainability of the AOW itself. It also affects other areas. A smaller workforce relative to the number of retirees has implications for healthcare spending, labor market tightness, and related productivity and innovation. The impact of a shrinking workforce therefore goes beyond the sustainability of the AOW system alone.”