Suppose you are between 60 and 70 years of age, and you only have a few years left before the mortgage on your house is fully paid off. Over the years, you have – almost imperceptibly – accrued quite a bit of capital, but it is largely invested: in your house and your pension fund. If you were able to convert that total capital into a monthly payment (if you retire at the age when you’re entitled to Old Age Pension), you would receive more than 70% of your last-earned salary. And you feel like you have accrued too much capital that you can’t do anything with. Early retirement is an option, but that is not very attractive: if you stop working five years early, for example, it decreases your pension by several dozen percent. And, of course, you can release your capital by taking out a second mortgage on your house, but then you will go into debt again with the accompanying obligations. So, the options are limited.
Helping your kids
Wouldn’t it be great if you could use a portion of that accrued pension to help your kids buy a house? Or to renovate your own house so that you can stay there even if you become less mobile? That way, with 10 to 20 percent of your total capital, you would get a lot more out of what you have been accruing all those years.
It is an important reason why I am in favor of “conditional freedom of choice based on your entire capital”. Currently, there are already requirements for withdrawing your pension, but they only look at the pension you have accrued. Those conditions (fortunately) protect the group of Dutch citizens that have not accrued much pension and don’t own their own home. An example of such a condition is the rule that someone’s pension cannot drop below 50 percent of the original level after using the freedom of choice (for example, early retirement or a temporarily lower or higher pension payment).
There is a downside to these “protective conditions”, however. They unnecessarily limit a relatively large group of people who have more capital in obtaining their preferences. After all, your total capital, not just your accrued pension, is relevant for your retirement. If the freedom of choice to withdraw your pension depends on that entire capital (including the available capital in your own home and investments), you have a more realistic basis from which to estimate if someone will benefit from protection or if flexibility is what is wanted and justified. For people with more capital there will then be more room to use a portion of their pension in an alternative way.
With conditional freedom of choice based on the total capital, the government helps citizens with a good distribution of their income over the entire lifespan and does not force them to inadvertently save too much. This would also benefit the government’s aim to keep people working longer.
Eduard Ponds is a Senior Strategist Research & Analytics at APG and endowed professor at the University of Tilburg