00:00We have still 57 million Americans who don't have any savings or any retirement plan.
00:06Whether it's state-funded pension plans for teachers and policemen or Social Security for
00:11everyone, we all know about the looming problems in providing adequate income for retirees in the
00:17United States. But it's not just the U.S. that has a problem. Many countries made provisions
00:22for those promises, and now promises are being cashed in. And many countries are saying, oh,
00:28wait, you know, we don't want to pay the bill. Teresa Ghilarducci is professor of economics and
00:34policy analysis at the New School in New York and author of Rescuing Retirement with Tony James.
00:41The challenges faced by retirees around much of the world are reflected in higher poverty levels
00:46of those over 65, with the OECD reporting that 40 percent of the elderly in Korea live on less than
00:53half of the median income in the country, and the United States just under 25 percent.
00:59Ghilarducci says one of the reasons is lower interest rates.
01:03The life expectancy does not put a strain on pension system. But what has changed is over
01:09the past 20 years, there was a regime of very low interest rates, you know, for lots of reasons.
01:15One of them was the financial crisis. A lot of it was the way that we managed our economies was
01:21to make sure that capital investment was low. That distorted a lot of decisions. But one of
01:26those things that it distorted is that the safe assets, like government bonds, didn't pay as much.
01:33The U.S. is hardly alone in facing the coming retirement crisis. But one country,
01:38the Netherlands, is doing something about it. Adrian Riker's firm is one of those putting those funds
01:44to work. In the Dutch pension system in the second pillar, there are around 1,600 billion euros of
01:51assets under management, which equates to around 1.5, two times the GDP of the Netherlands.
01:59That 1.6 trillion euros in Dutch pension assets accounts for 59 percent of all European pension
02:07funds, while having only 4 percent of the population, which means that it ranks near the bottom of the
02:13OECD numbers in elderly poverty at just under 5 percent. But despite having more assets set
02:20aside for retirement than any other European country, the Netherlands is about to overhaul
02:25the fundamentals of its pension system. Now we are moving from defined benefits to defined
02:32contribution. And the reason for this change is mainly to increase the sustainability of the fund
02:38towards the future. At first glance, the math seems straightforward. The old model wasn't
02:44sustainable. It was time for something new. But the debate over restructuring the system was anything
02:50but simple. The private pillar is what is in the process of getting reformed now. That reform took a
02:58number of years to reach. Discussion started in the early 2000s after the dot-com crisis when a number of
03:05Dutch pension funds saw their coverage ratios drop. It came to a conclusion sort of around the start of
03:12the pandemic when the shape of the current pension reform was decided upon. Stan Voiger is a senior
03:19fellow in economic policy studies at the American Enterprise Institute and director of the Netherland
03:24America Foundation. That didn't mean, of course, that the political discussions around the reform
03:30completely dissipated. In the outgoing government, the Schof cabinet that was in place for the past year
03:39or so, there was one political party, the New Social Contract Party, that was quite aggressively opposed
03:47to the pension reform as it had been designed. And they, in fact, tried to derail it by letting individual
03:54workers and retirees vote on an industry by industry or occupation by occupation or even firm by firm
04:01basis on whether to remain under the old pension system, which is a, you know, defined benefit system,
04:09basically, or whether to accept transition to the new, more collective defined contribution system.
04:14That effort by them ultimately failed. It lost a vote in parliament, but only barely. And I think that was
04:21really the end of political uncertainty around this pension reform, not only because that vote failed,
04:26but also because the Schof government fell this summer. We had elections and the party most associated
04:34with those efforts to basically undo the pension reform to a significant extent. That party lost all of its
04:40seats in parliament. The Dutch pension plan changes may be controversial, but necessary, given the larger forces
04:47that all retirement plans in Western countries are facing. The move to define contributions is something that we see
04:54all across the globe. If we look at the pension index that is published yearly, if you look at what pension advisers and
05:02actuaries are saying, exactly, these changes are not specific to just the Netherlands. But because we have such a large pension
05:11buildup, we have so much capital in the system, very high adequacy rates, it is very prevalent in the Dutch
05:18system. Since the global financial crisis, interest rates have been in steady decline, mainly because of monetary
05:26policy. And because of the way that pension liabilities are valued, they have a direct link with interest rates. And as interest rates
05:35decrease, the liabilities of pension funds increase and thus place a burden on the pension fund's sustainability.
05:42But also on top of that, you have longevity, which has increased amongst the participants. And coverage in the
05:50Netherlands of the second pillar pensions is very high. The way in the old system that we had, the way it worked, is that
05:58employees would usually stay at the same firm that they started at or stay within the same industry and work until
06:07the retirement age. And if this happened, the current pension system was perfectly equipped for this. But nowadays, we see
06:18more and more people moving away from a lifetime employment and moving more into self-employment.
06:25One way to address the increased number of people relying on their pensions amid lower interest rates might be to
06:32extend the time when people start receiving their benefits. But that is not the way the Netherlands chose to go.
06:39The reforms mainly are in the way we invest and changing from defined benefits to only defining the contribution.
06:49The Dutch system is designed to increase the size of the available pie by permitting pension
06:54asset managers to invest in higher risk and higher yield assets for younger workers with many years to go until their retirement.
07:02You now go to a more individual approach with your collective investments in that you have to see what individual investors need at certain age groups.
07:14So for instance, a young person on average has less financial capital, but still has a lot of years to work in its career.
07:24And what that enables younger investors to do is to take on more risk because the biggest determinant of capital buildup at a young age is the contributions you get each year.
07:38But as you near the end of your career contributions become less of a big part, less of a big influence on the income that you will have on retirement and the income or the focus shifts from contributions to investment results that should be stable and lower in shocks.
07:58Whether permitting more flexible investments, particularly riskier ones for earlier in a worker's life will work or not.
08:05It does relieve the pensions from facing obligations greater than their resources, but also means that one's benefits could go up or down depending on the markets.
08:14Getting people to agree to this big change took time and all the stakeholders working together.
08:20One distinguishing feature of the Dutch system of policy making is that there is a lot of focus on consensus building between employers, employees and the government.
08:33The fact that the Netherlands has these structures that facilitate the coming together of business and labor, I think is particularly helpful in the pension context.
08:44There are lots of political problems where there are all sorts of other stakeholders involved, but in the pension context it really still is employers and employees who have to come together and reach agreement on how to design the pension system.
08:59What can the rest of the world learn from the Dutch in providing for retirement?
09:03Perhaps a lesson in persistence.
09:05The most recent changes are just the latest in a series of attempts at pension reform.
09:10Go back to the 80s under Ronald Reagan when they did take steps to try to extend Social Security.
09:17What made it possible then that doesn't make it possible now?
09:21Well, what made it possible for a bipartisan commission and a fix to happen was that the crisis was only one year away.
09:32It had to do with surprise inflation and a surprise among the actuaries that they wouldn't have enough money in the shortfall.
09:39So money needed to be infused into the system immediately.
09:44And so the Greenspan Commission under the Reagan administration recommended that the payroll tax be increased and everybody agreed.
09:52Later, when it came to Congress, there was some political effort to say, well, if we're going to raise taxes, we have to really look to see how much the taxes have to be increased.
10:04And so that's when they looked at the past and said, well, since everybody's living longer, then we should have a system that represents that and will raise the retirement age to 67.
10:16But that cut in benefit was going to be in the future. And they all agreed they needed infusion of cash and taxes were increased.
10:23Maybe that's what we need to raise taxes is to have a real look at what taxes pay for. And everyone likes their Social Security benefits.
10:34Whether it's relying more on the capital markets like the Netherlands or turning to taxpayers to contribute more.
10:40The United States and other Western nations have some tough choices to make, and they need to be made sooner rather than later as people live longer and we want to provide for them without stealing from the future.
10:52The United States and the United States and the United States.
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