Imagine
a place where pensions were not an ever-deepening quagmire, where the
numbers told the whole story and where workers could count on a decent
retirement.
Imagine a place where regulators existed to make sure everyone followed the rules.
That
place might just be the Netherlands. And it could provide an example
for America’s troubled cities, or for states like Illinois and New
Jersey that have promised more in pension benefits than they can
deliver.
“The
rest of the world sort of laughs at the United States — how can a great
country like the United States get so many things wrong?” said Keith
Ambachtsheer, a Dutch pension specialist who works at the University of
Toronto — specifically at its Rotman International Center for Pension Management, a global clearinghouse of information on how successful retirement systems work.
Going
Dutch, however, can be painful. Dutch pensions are scrupulously funded,
unlike many United States plans, and are required to tally their
liabilities with brutal honesty, using a method that is common in the
financial-services industry but rejected by American public pension
funds.
The
Dutch system rests on the idea that each generation should pay its own
costs — and that the costs must be measured accurately if that is to
happen. After the financial collapse of 2008, workers and retirees in
the Netherlands took the bitter medicine needed to rebuild their
collective nest eggs quickly, with higher contributions from workers and
benefit cuts for pensioners.
The
Dutch approach bears little resemblance to the American practice of
shielding the current generation of workers, retirees and taxpayers
while pushing costs and risks into the future, where they can
metastasize unseen. The most recent data suggest that public funds in
the United States are holding just 67 cents for every dollar they owe to
current and future pensioners, and in some places the strain is
palpable. The Netherlands, by contrast, have no Detroits (no cities
going bankrupt because pension costs grew while the population shrank),
no Puerto Ricos (territories awash in debt but with no access to
bankruptcy court) and nothing like an Illinois or New Jersey, where
elected officials kicked the can down the road so many times that it
finally hit a dead end.
About
90 percent of Dutch workers earn real pensions at their jobs. Their
benefits are intended to amount to about 70 percent of their lifetime
average pay, as many financial planners recommend. For this and other
reasons, the Netherlands has for years been at or near the top of global
pension rankings compiled by Mercer, the consulting firm, and the Australian Center for Financial Studies, among others.
Accomplishing
this feat — solid workplace pensions for most citizens — isn’t easy.
For one thing, it’s expensive. Dutch workers typically sock away nearly
18 percent of their pay, most of it in diversified, professionally run
pension funds. That compares with 16.4 percent for American workers, but
most of that is for Social Security, which is intended to provide just 40 percent of a middle-class worker’s income in retirement.
Dutch
employers contribute to their system, too, but their payments are
usually capped. While that may seem a counterintuitive way to make sure
that pensions are well funded, it actually encourages companies to stick
with pension plans. If the markets drop, Dutch employers do not receive
urgent calls to pump in more money — the kind of cash calls that have
prompted so many American companies to stop offering pensions. In the
private sector, only 14 percent of Americans with retirement plans at
work have defined-benefit pension plans — the ones that offer the most
security — compared with 38 percent who had them in 1979. And if the
markets rally and a Dutch pension fund earns more than it needs, the
employers are not allowed to touch the surplus. In the United States,
companies have found many ways to tap a pension surplus. The problem
today is that there usually is no surplus left.
Dutch
companies, as well as public-sector employers, typically band together
by sector in big, pooled pension plans, then hire nonprofit firms to
invest the money. Terms are negotiated sectorwide in talks that resemble
American-style collective bargaining.
This
vast collaborative process may sound too slow, too unwieldy and maybe
even too socialist for American tastes. But standing guard over it is a
decidedly capitalist watchdog, the Dutch central bank. More than a
decade ago, after the dot-com collapse, a director of the central bank
warned of a looming pension funding crisis. In response, the central
bank in 2002 began to require pension funds to keep at least $1.05 on
hand for every dollar they would have to pay in future benefits. If a
fund fell below the line, it had just three years to recover.
American
public pension funds have no such minimum requirement, and even if they
did, there is no regulator to enforce it. Company pensions are bound by
federal funding rules, but Congress has a tendency to soften them.
The
Dutch central bank also imposed a rigorous method for measuring the
current value of all pensions due in the future. Pensions are not
supposed to be risky, so the Dutch measure them the same way the market
prices very safe bonds, like Treasuries — that is, by discounting the
future payments to today’s dollars with a very low interest rate. This
method shows that a stable lifelong benefit is very valuable, and
therefore very expensive to fund.
Notably,
the Dutch central bank prohibited the measurement method that virtually
all American states and cities use, which is based on the hope that
strong market gains on pension investments will make the benefits
cheaper. A significant downside to this method is that it lets pension
systems take advantage of market gains today, but pushes the risk of
losses into the future, for others to cope with. “We had lengthy
discussions about this in the Netherlands,” said Theo Kocken,
an economist who teaches at the Free University in Amsterdam and is the
founder of Cardano, a risk analysis firm. “But all economists now
agree. The expected-return approach is a huge economic offense, hurting
younger generations.”
He
explained that in the Netherlands, regulators believe that basing the
cost of benefits today on possible investment gains tomorrow is the same
as robbing tomorrow’s workers to pay for today’s excesses.
Most
public pension officials in the United States reject this view, saying
governments can wait out bear markets because governments, unlike
companies, don’t go out of business.
For
years, economists have been calling on American cities and states to
measure pensions the Dutch way. And, in fact, California’s big state
pension system, Calpers, sometimes calculates a city’s total obligation
by that method. When Stockton went bankrupt, for instance, Calpers
recalculated and found that the city owed it $1.6 billion. Of course,
Stockton is insolvent and does not have an extra $1.6 billion, but
Christopher Klein, a bankruptcy judge, has said that federal bankruptcy
law permits it to walk away from the debt. Calpers disagrees, setting up
a clash that seems destined for the United States Supreme Court.
But
most of the time, when someone in the United States calls for
Dutch-style measurements, pension officials suspect a ploy to show
public pensions in the worst possible light, to make them easier to
abolish.
“They
want to create a false report, to create a crisis,” said Barry
Kasinitz, director of government affairs for the International
Association of Fire Fighters, after members of Congress introduced a
bill to require the Dutch method.
The
Dutch say their approach is, in fact, supposed to prevent a crisis —
the crisis that will ensue if the boomer generation retires without
fully funded benefits. Their $1.05 minimum is really just a minimum;
pension funds are encouraged to keep an even bigger surplus, to help
them weather market shocks. The Dutch sailed into the global collapse of
2008 with $1.45 for every dollar of benefits owed, far more than they
appeared to need. But when the dust settled, they were down to just 90
cents. The damage was so bad that the central bank gave them a breather:
They had five years to get back to the $1.05 minimum, instead of the
usual three.
American
public plans emerged from the crisis in worse shape, on the whole, and
many allowed themselves 30 years to recover. But 30 years is so long
that the boomer generation will have retired by then, and the losses
will have been pushed far into the future for others to repay.
It’s
a recipe for disaster if the employer happens to be a city like
Detroit. The city’s pension system used a 30-year schedule to cover
losses but reset it at “Year 1” every year, a tactic employed in a
surprising number of places. In Detroit, it meant the city never
replaced the money that the pension system lost. When Detroit finally
declared bankruptcy last year, an outside review found a $3.5 billion
shortfall, one of the biggest claims of the bankruptcy. Manipulating the
30-year funding schedule had helped to hide it.
“This happening in the Netherlands is totally out of the question,” Mr. Kocken said.
While
the Netherlands has a stellar reputation for saving, that doesn’t mean
pensions have been without controversy there; in fact, a loud,
intergenerational debate is occurring about how to manage pensions. The
financial crisis raised new calls for reform, Mr. Ambachtsheer said.
Retirees were shocked and angry to have their pensions cut by an average
of 2 percent after the crash. That had never happened before, and many
had no idea that cuts were even possible. A new political party, 50Plus,
sprang up to defend the interests of older citizens and won two seats
in the national Parliament.
But
something else happened: Dutch young people found their voice. No
matter their employment sector, they could see that their pension money
was commingled with retirees’ money, then invested that way by the
outside asset management firms. In the wake of the financial crisis,
they realized that they and the retirees had fundamentally opposing
interests. The young people were eager to keep taking investment risk,
to take advantage of their long time horizon. But the retirees now
wanted absolute safety, which meant investing in risk-free, cashlike
assets. If all the money remained pooled, young people said, the
aggressive investment returns they wanted would be diluted by the
pittance that cashlike assets pay.
“Now
the question is, ‘How do you resolve this dilemma?’ ” Mr. Ambachtsheer
said. “Everybody wants safety and everybody wants an affordable system,
and you can’t have both. It’s become a major public debate in the
Netherlands.”
It’s a debate that is rarely, if ever, heard in the United States.
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