Netherlands bears part of the costs of ageing in other EU countries

Countries in the European Union with fully funded pension schemes, such as the Netherlands, will in the long term bear part of the burden of an ageing population in countries operating a pay-as-you-go (PAYG) system.

The 'fully funded countries' will eventually share in the costs of ageing in the 'PAYG countries', particularly if these countries are using government debt to finance the long-term costs of ageing. This is the conclusion of the Dutch economist Yvonne Adema in the thesis she will be defending at Tilburg University, the Netherlands, on 30 May. She also recommends that decisions on pension reforms should be made at the European level.

During the next few decades, many western countries will be confronted with an ageing population. However, the economic effects will vary from country to country. Yvonne Adema has carried out pioneering scientific research into how countries operating different pension systems, and therefore showing different saving reactions to this phenomenon, influence each other via capital markets. The various member states will inevitably feel the consequences of the way in which other countries have organized their pension systems or the pension reforms implemented in response to the problem of ageing. The effects will particularly be felt in Europe, where the countries using the Euro already have a fully integrated capital market.

Countries like the Netherlands with an extensive fully funded pension system, whereby people save for their retirement, will ultimately be faced with the problems of the countries in the Economic and Monetary Union (EMU) that operate a PAYG system. According to Adema's analysis, this is because the savings in 'fully funded countries' rise more steeply in response to ageing than in countries with a PAYG system such as Italy and Germany. On balance, the result will be a capital flow into these latter countries. Moreover, the cost of pensions in 'PAYG countries', where the working population finances the pensions of the older citizens, will rise sharply as the number of pensioners increases relative to the number of people in the workforce. If these countries then use government debt to cover the cost of the ageing population, the 'fully funded countries' will find themselves facing some of the costs. If the government debt is very high, this can lead to inflation with direct implications for the rest of the common capital market.

According to Adema, it is therefore vital that all countries in the EMU comply with the Stability and Growth Pact. It is also important that the European Central Bank is independent, credible and transparent.

Reform is not always the answer

It is often suggested that the tenability of public PAYG systems can be improved by reforming them and switching to a fully funded system. However, in her thesis Adema shows that this can have negative implications for fully funded countries within the common capital market. The economist is therefore putting forward a case for coordinating or even centralizing the decision-making on pension reform.

Yvonne Adema (1979, Meppel) studied economics at the University of Groningen, the Netherlands (passing cum laude) and conducted her PhD research at the CentER Graduate School in the Faculty of Economics and Business in Tilburg. She specializes in public economics, international and monetary economics. Since October 2007, she has been working as a postdoctoral researcher for the Economics Department at Tilburg University and Netspar, the Network for Studies on Pensions, Aging and Retirement. She is also affiliated to the Netherlands Bureau for Economic Policy Analysis.