Contrasting Pension Systems: Canada vs The Netherlands

Updated: May 28

Because Google Adsense deemed this website to have too little content for ads, I'll be posting my top 25 undergraduate papers. This is the term paper economic demography. I think this was my only paper to get 100%. Perhaps it was because it was too boring for the professor to read all the way through.



Dalhousie University

ECON 2400

November 25th, 2019



Pensions have been one of the most successful tools in the growth of life expectancy. Given that elderly individuals cannot work, it makes sense to have a system that you pay into over your life to make sure you have an adequate amount of resources to live on after you retire. There exist many different kinds of systems of pensions around the globe, but they can be objectively rated and ranked with numbers and algorithms. The Monash Centre for Financial Studies publishes pension reports known as the Melbourne Mercer Global Pension Index. In the latest report, the Netherlands and Denmark are quite close in their final scores, but the Netherlands comes up on top with 80.3 versus the score of Denmark at 80.2. That makes the Netherlands the best pension system in the world according to their calculations. Canada scores 69.2 ranking them as number 9.(1) How does this index work and what do the authors have to say about the Dutch and Canadian pension systems in terms of how they can be improved? Then again, how are the pensions of the two countries structured in the first place? It turns out their structure is surprisingly similar. But the Organization for Economic Co-operation and Development publishes specific data metrics on individual pension systems around the world, and the Netherlands and Canada have some surprising differences among their data results.

First of all, with regard to how the index that marks the Netherlands as champion works, the totality of the overall index value is divided into three sub-index values. Those are adequacy, sustainability and integrity. The report describes adequacy as "…the base (or safety-net) level of income provided as well as the net replacement rate at income levels ranging from 50 percent to 150 percent of the average wage." Sustainability brings in the old-age dependency ratio, whether or not there's an opportunity for phased retirement and labour force participation of older workers. It also considers "contribution rates, the level of pension assets, the coverage of the private pension system as well as real economic growth over the long-term." The final measure, integrity, "considers the role of regulation and governance, the protection provided to plan members from a range of risks and the level of communication provided to individuals." Integrity also factors in value from pensions. That means costs and industry structures are kept at reasonable levels. The three indexes are weighted differently to calculate the final number. The adequacy index counts for 40 percent. The integrity index counts for 35 percent and the integrity index counts for 25 percent.

The report includes not only all index figures for each of the 34 pension systems analyzed for the year 2019, but also the previous year so changes can be observed. As far as the overall index is concerned, from 2018 to 2019, Canada moved from a score of 68 to a score of 69.2. That is because, while their adequacy score dropped from 72.1 to 70 and their integrity score of 78.2 remained the same, their sustainability score increased massively from 56 to 61.8. That is quite an impressive jump for 12 months. Moving over to the Netherlands, their overall index score increased slightly from 80.3 to 81.0 from 2018 to 2019. That is primarily due to their adequacy index rising from 75.9 to 78.5. Although their sustainability score decreased from 79.2 to 78.3 and their integrity score remained about the same. The report gives the Netherlands an A rating describing it as "A first-class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity." While they put Canada in the B grade category, describing it as "A system that has a sound structure, with many good features but has some areas for improvement that differentiates it from an A-grade system."

Thankfully the report also details some specifics and a brief review of each country. It mentions how the overall index value for the Canadian system could be increased by "Increasing the coverage of employees in occupational pension schemes through the development of an attractive product for those without an employer-sponsored scheme." This means that the Canadian government should do more to promote and educated about occupational pension schemes. They also recommend that Canada work towards increasing the level of household savings and reducing the level of household debt. The report does not suggest ways of doing this. However, some proxy methods could be incentivizing greater urbanization to get people to use public transit instead of partaking in car buying loans. Another proxy that could be used, and also generated by urbanization, is incentivizing apartment living to lower the number of people applying for homeownership loans. This would decrease the money spent on insurance, maintenance, gasoline, etc., that could instead be used towards general household savings. Of course, overall wages could be raised as well. It is fair to assume Canadians aren't saving as much money as the Dutch because Canada's GINI is 0.34, while the Netherlands GINI is 0.28. (2)

The last two points of recommendation given in the report can be argued against in good faith. The report claims that Canada ought to reduce its government debt as a percentage of GDP to get a higher score, presumably of sustainability. However, Canada is a country that prints its own currency, so if Modern Monetary Theory ends up being the consensus in the future (that government deficits only cause inflation and not recessions)(3), this point in the report will not be of a top priority. That is because none of the developed countries are ever going to let seniors fend for themselves for necessities; it would be unethical. So, either the pension funds are going to come out of the federal government's pocket, or the private sector's pocket. The private sector would be more than happy to have pensions funded in the form of government deficits than by raised private sector taxes (to balance the government budget) or elderly people dying because they can't ford necessities. Those are the only three possible outcomes according to the economics of sectoral balances. Regardless, the final proposal the report gives to the Canadian government is to increase the labour force participation rate at older ages as life expectancies rise. The problem with that statement is that it is an oversimplification. Just because life expectancies rise, meaning we gain on the ability to keep people alive longer, does not mean that the age with which people become immobile enough to warrant retirement increases. This goes back to what was previously pointed out about MMT. If it turns out to be accurate, then there's no point in asking private companies to pay immobile workers to do nothing of value when the government could just pay them directly enough for their necessities. The private sector would be happier with the ladder.

Now, moving onto what the report says about the Netherlands specifically. It turns out that coming in first as far as pension systems leaves little to be critical of. All the report suggests is that the Dutch try to reduce household debt and increase labour force participation of citizens at older ages. It would be difficult to see what the Netherlands could do to reduce household debt, considering their GINI is among the best in the industrialized world, and over 91 percent of Dutch people live in urban areas. As opposed to 80 percent of Canadians who live in urban areas.(4) It may seem surprising that the Netherlands is deemed to have a much more sustainable pension system than Canada does. After all, the Netherlands has an average age of 42.6 years, while Canada has an average age of 40.8 years.(5) However, it was brilliant of the authors of the report to include other metrics in the measure of the sustainability of pension systems such as real economic growth over time.

That explains how the index works, but how exactly does the structure of the pension system in the Netherlands itself work? In the Netherlands, there are three pillars of pensions. The first is a state-guaranteed pension that everyone begins receiving at the age of 67. However, the amount that you are granted is dependent on various factors, such as whether or not you live alone and whether or not you have a partner that has also reached pension age. You can enjoy your state-given pension even if you retire somewhere else. However, you must have paid into the system in the Netherlands to enjoy this feature. This is a feature that makes rational sense. Retired persons have the highest health care costs, so if retirees wish to live out the rest of their life in a different jurisdiction, that makes economic sense. The second pillar is private employee pensions. These plans are managed by pension funds or insurance companies that are linked to specific industries or companies. Over 90 percent of employees have a private pension scheme. The third pillar consists of individual private pensions. These are used by self-employed individuals and employees in sectors without a collective pension scheme.(6)

Pensions in Canada are similar to those in the Netherlands because they follow a public and private model. The Canadian Pension Plan (CPP) is a government pension plan that everyone employed aged 18 and older must contribute to with a portion of their income. This is separate from Old Age Security, which is a universal retirement pension available to most residents of Canada who have reached the age of 65. Canada also has optional Registered Retirement Savings Plans, which is an additional public pension for which the earner pays into over time. In addition to that, there are employer-sponsored private pension plans for employees.(7) Although the government regulates these plans, they are private. It appears as tho the foundations of the pension systems in the Netherlands and Canada are quite similar. But is the OECD data on their pension systems just as similar?

The Organization for Economic Co-operation and Development (OECD) has specific statistics comparing pension plans around the world. In data collected as recently as 2014, the differences between Canada and the Netherlands are visible. While older Canadians are far more reliant on capital (40.1 percent) and work (24.8 percent), the Dutch are far more reliant on public transfers (43.7 percent) and occupational transfers (37.7 percent). The percentage figure indicates it is their top source of income. About 35 percent of Canadians count on public transfers for income, and strikingly, 0 percent of Canadians are using occupational transfers for their top sources of income. That is a clear distinction between the two pension systems. Only 9 percent of Dutch are using capital for the top source of income, and 9 percent of Dutch are also using work for the top source of income. The idea mentioned previously about the Dutch having an advantage in savings because of their significantly lower GINI is evident in the 2014 data on pensions and income. That year, the average worker earnings were 42,689 USD for Canadians, while the average worker earnings for the Netherlands was 59,165 USD. It is quite visible from that figure alone why the older Dutch are less reliant on work. They simply have a greater opportunity to save than do the Canadians. The table from 2014 also shows the Netherlands having a much lower old age income poverty ratio. For individuals 66 years and over, the ratio for Canada is 9.0, while for the Netherlands, it is 3.7.(8)

While those figures from 2014 related to income are helpful, the OECD has more recent numbers on the foundations of the pensions themselves, and these numbers are much more recent, being from 2018. They are published in a report titled “Pension Markets in Focus 2019.” The numbers reveal that the Netherlands is far more invested in its pension system. For example, when using the metric of pension funds assets as a share of GDP, the Netherlands scores 173.3 percent. That is compared to 84.4 percent for Canada. When looking at contributions as a percentage of GDP, the Netherlands contributes 4.1 percent of its GDP towards pensions. While Canada contributes 2.8 percent of its GDP towards its pensions. That is quite the difference in funds considering both economies in total are in the area of a trillion USD each. The final statistic of note is the metric of benefits paid as a percentage of GDP. In the Netherlands, 4.0 percent of the GDP is devoted to pension benefits. While in Canada, 3.4 percent of GDP is devoted to pension benefits.(9) It is interesting that in Canada, a higher percentage of GDP is devoted to benefits than is devoted to contributions. While in the Netherlands, they're about the same. A possible speculation for why this can be the case is, again, going back to MMT, the Netherlands does not print its own currency. It uses the Euro, which is printed at the behest of the European Union, not the Dutch government. So, it must maintain a balanced budget to ensure investment stability, the same way Nova Scotia must maintain a balanced provincial budget. The fact that the Netherlands has been able to achieve the best pension system in the world while needing to keep a balanced federal budget is certainly impressive.

In summary, according to the Monash Centre for Financial Studies and their 2019 report, the Melbourne Mercer Global Pension Index, Canada ranks 9th in the world with its pension system. While the Netherlands ranks the best in the world. The Netherlands scores better on all three categories of adequacy, sustainability and integrity. The report recommends that Canada do a better job of promoting its additional non-mandatory pension schemes and try to increase household savings. The unfortunate low level of saving on behalf of Canadians could be blamed on Canada having a significantly higher GINI than countries like the Netherlands, which is also visible through the 2014 OECD figure of Canada having a much lower average income than the Netherlands. Both pensions have very similar structures having multiple pillars. Both countries have guaranteed old age security incomes, mandatory government pensions that must be paid into, optional private pensions that are available from employers and other private institutions. Significant differences in figures can be observed from OECD data on pensions. Their 2014 data reveals that older Canadians are much more reliant on capital and work while older Dutch individuals are much more reliant on public transfers and occupational transfers. The specific data metrics in their 2018 figures are also quite revealing. Pension funds assets in the Netherlands are 173 percent of its GDP while the figure is 84 percent for Canada. The Netherlands contributes 4.1 percent of its GDP towards its pensions while Canada contributes 2.8 percent. Perhaps the most telling is the Netherlands devoting 4.0 percent of its GDP towards pension benefits while Canada spends 3.4 percent of its GDP towards pension benefits. It is quite impressive that the Netherlands has been able to not only achieve but to maintain its status as the best pension system on the globe while needing to balance its federal budget as a top priority because it is a member state of the European Union. What could be the real question concerning the amount of money allocated to pensions is the effect that AI and automation will have on individual economies. Science and technology advance on an exponential level. With automation and free trade, the economic pie grows. That is because it becomes easier than before to produce abundance. With that new efficiency, the economy grows. Will it grow at a rate to exceed the worry that there won't be enough resources to pay for pensions considering our population is ageing so the income tax pool is shrinking? Only time will tell.




Bibliography


Matthews, Dylan. “A Very Detailed Walkthrough of Modern Monetary Theory, the Big New Left Economic Idea.” Vox. Vox, April 16, 2019. https://www.vox.com/future-perfect/2019/4/16/18251646/modern-monetary-theory-new-moment-explained.


Melbourne Mercer Global Pension Index (Melbourne: Monash University, 2019).


Organisation For Economic Co-Operation and Development. “Pensions at a Glance: Income and poverty of older people.” OECD.stat, 2014. Accessed November 25th, 2019.


Organisation for Economic and Co-Operative Development. “Pension Markets in Focus 2019.” Accessed November 25th, 2019. http://www.oecd.org/daf/fin/private-pensions/Pension-Markets-in-Focus-2019.pdf


Service Canada. Canada Pension Plan Retirement Pension (booklet - March 2014), ISPB-147-03-14E.


Sibylle J.M. Reichert ."Dutch Pension System an overview of the key aspects",Pensioenfederatie.nl http://www.pensioenfederatie.nl/stream/nederlandsepensioensysteemengelstaligeversie.pdf


World Bank. “GINI Index (World Bank Estimate).” World Development Indicators, The World Bank Group, 2017, https://data.worldbank.org/indicator/SI.POV.GINI?most_recent_value_desc=false. Accessed November 25, 2019.


“World Factbook Urbanization.” Central Intelligence Agency. 2018. Accessed November 25th, 2019.


“World Factbook Median Age.” Central Intelligence Agency. 2018. Accessed November 25th, 2019.




1 - Melbourne Mercer Global Pension Index (Melbourne: Monash University, 2019).

2 - World Bank. “GINI Index (World Bank Estimate).” World Development Indicators, The World Bank Group, 2017.

3 - Matthews, Dylan. “A Very Detailed Walkthrough of Modern Monetary Theory, the Big New Left Economic Idea.” Vox. Vox, April 16, 2019.

4 - “World Factbook Urbanization.” Central Intelligence Agency. 2018.

5 - “World Factbook Median Age.” Central Intelligence Agency. 2018.

6 - Sibylle J.M. Reichert ."Dutch Pension System an overview of the key aspects",Pensioenfederatie.nl

7 - Service Canada. Canada Pension Plan Retirement Pension (booklet - March 2014), ISPB-147-03-14E.

8 - Organisation For Economic Co-Operation and Development. “Pensions at a Glance: Income and poverty of older people.” OECD.stat, 2014.

9 - Organisation for Economic and Co-Operative Development. “Pension Markets in Focus 2019.”