Raised state pension age curbs spending on benefits

Total savings for the Treasury achieved through raising the AOW entitlement age have reached almost 4 billion euros since 2013. Earlier this year, the entitlement age was raised again to 66 years, and it is set to be increased further in stages over the next few years. Each further increase of the AOW entitlement age will also boost annual savings further.

Indirect effects of raising AOW entitlement age hard to calculate

The amounts stated here only refer to the direct effects on the total costs of AOW pension benefits. However, raising the AOW entitlement age has numerous indirect effects as well. This includes effects on employment, premiums, direct and indirect taxes as well as on the number of people who will continue to be eligible for other benefits, e.g. occupational disability, unemployment or social assistance benefits. None of these effects have been taken into account here. The difficulty in calculating these indirect effects is that they depend to a large extent on people’s behaviour. For example, it is difficult to determine the extent to which a higher AOW entitlement age influences someone’s decision to remain in work for longer.

Public spending on AOW exceeding 37 billion euros

Total public expenditure on AOW benefits in 2017 came to 37.4 billion euros. Ten years previously, this was still 25.2 billion euros. Public spending on AOW benefits rises each year owing to a growing number of recipients as well as semi-annual indexing. In 2015, the costs of AOW benefits increased by 0.9 billion euros as a result of a new AOW-related income support measure, the IOAOW or AOW top-up. The top-up replaced the purchasing power allowance MKOB for elderly people in 2015.

AOW down as a share of GDP in 2017

After years of continuous increase, public expenditure on AOW pension benefits as a percentage of gross domestic product (GDP) declined in 2017. Last year, the government spent slightly under 5.1 percent of GDP on AOW pension benefits; this was still over 5.2 percent in 2016. In absolute terms, spending increased by 0.5 billion euros, as the total amount in 2017 stood at 37.4 billion euros versus 36.9 billion euros in 2016. The decline as a percentage of GDP was the result of the economic growth in 2017. In 2007, AOW pension benefits accounted for 4.1 percent of GDP.

Influx of recipients declining

In December 2017, over 3.4 million people were receiving an AOW pension benefit, against fewer than 2.7 million in December 2007. At the same time, the influx of new recipients is declining. At the peak of the influx in 2011, the number of new AOW benefit recipients increased by over 255 thousand. These were the baby-boomers who were born in the immediate post-war period. In 2017, the number of new AOW benefit recipients increased by less than 165 thousand. The number of people reaching the AOW entitlement age has decreased since then. Raising the AOW entitlement age in itself will also have a downward effect on the influx. No more new recipients were added in the first three months of 2017 as the entitlement age was raised by 3 months relative to 2016.
At the same time, the number of terminated AOW benefits due to mortality saw a slight rise. In 2017, over 140 thousand AOW benefits were terminated, against less than 120 thousand in the year 2011.

‘Fiscalisation’ of AOW

As of 2000, the AOW pension benefit scheme has been subjected to an expanding overhaul by means of ‘fiscalisation’. As a result, the AOW scheme is no longer paid through salary contributions but increasingly funded by a general government contribution from taxes. The AOW contribution percentage was set at 17.9 as of 1999. This contribution is paid through wage and income tax (deducted from salary or benefit). The government’s total premium income from AOW contributions has increased sharply in absolute terms: from 14.6 billion euros in 1995 to 23.9 billion euros in 2017. However, due to demographic ageing, public expenditure on AOW benefits increased even more substantially, resulting in a growing difference between the income from premiums and the expenditure on benefits. By 2017, the difference amounted to 13.5 billion euros. Conversely, income from AOW contributions was higher than benefit expenditure in 2000. In the Netherlands, people who have reached the AOW entitlement age no longer have to contribute to premiums, but continue to contribute to the general budget through taxation.