A few days ago, ELROD posted an interesting and eye-opening article, the opening sentence of which was “You think it’s bad here in the US of A?”
The article, “Eastern Europe is Broke,” was about the dire financial straits many of the nations of Eastern Europe find themselves in today, after several years of “astonishing growth.”
ELROD refers to this as phenomenon as “Oh, the good old days. Well, they’re done. Kaput”
I voiced a similar concern about a week ago, not for Eastern Europe, but for a country in Western Europe. A country that is a member of the European Union. A country whose economy has been repeatedly held as a model for other European economies. And a country on which the Organization for Economic Cooperation and Development (OECD) as late as January 31, 2008, had this to say:
The Netherlands is well out of its economic stagnation in the first half of the 2000s and is now once again in good shape. The recovery of the past years has been robust, helping to maintain GDP per capita in the OECD’s top league. The very open Dutch economy has benefited from the supportive international environment and investors have continued to be attracted by its business-friendly environment. The country has also benefitted from past structural reforms, notably reforms of pension systems, health care and disability benefits, which have contributed to putting public finances on a sounder footing and have encouraged labour market participation.
The report does go on to mention some possible storm clouds appearing on the horizon for the Dutch economy.
Talking about storm clouds, in “Time for a Global Stimulus Plan?,” I quoted the Dutch NRC Handelsblad’s article titled “Perfect storm in the Dutch economy”:
A perfect storm is bearing down on the Dutch economy. On Tuesday the Netherlands bureau for economic policy analysis CPB published a surprisingly bleak scenario for 2009 and 2010. The predicted economic shrinkage of 3.5 percent promises to be the greatest drop since 1931, on the eve of what became a lost decade.
This morning, the same newspaper carried another article with possibly bad news for a large segment of its population, pension recipients.
And, again, I thought of ELROD’s words, “You think it’s bad here in the US of A?” Especially after reading news reports of federal employees unions complaining that federal employees are slated to “only” get 2.0 percent pay raises next year.
Well, this according to the Handelsblad article “Dutch pensions under pressure”
More than 4.7 million Dutch run the risk that their pension fund will have to lower the pensions it pays out in the coming years in order to avoid collapse.
The article makes it clear that this only “concerns (former) employees and pension recipients from large industry pension funds, such as the fund for the metal working sector, the pension fund for civil servants and teachers and several company pension funds.”—about 4.7 million of them, and goes on to explain:
In the Netherlands, pension funds are required by law to have assets of at least 1.05 for every euro of committed pension. Pension experts say that the danger zone is from 0.90 euros and downwards – what the sector calls a coverage ratio of 90 percent (or lower). “With 90 percent or lower, an average fund cannot manage to reach 105 percent in five years’ time without taking drastic measures, like raising premiums or lowering the amount of pensions paid out to recipients,” says Dennis van Ek of consultancy firm Mercer.
The banks and insurers that finance minister Wouter Bos has spent billions of euros to bail out over the past months were all financially healthy, but the pension sector is in essence bankrupt.
“Many pension funds” had a shortage of assets at the end of 2008. “There is a problem of solvency,” social affairs minister Donner wrote to Dutch parliament. Numerous pension funds are in a position where their obligations exceed their assets.
And some encouraging words:
Regular companies that have an shortage of assets and can no longer raise capital simply go bankrupt. But pension funds are different. They are like piggy banks in the Netherlands, holding a total of 600 billion euros. Capital is the least of their problems. Creditors such as pension recipients may try to have their pension funds declared bankrupt, but it is doubtful whether a court will actually do that. As the pension world and minister Donner have repeatedly assured us: the payment of pensions is not in danger.
But, nevertheless, it concludes:
Union related funds with an ageing workforce are more vulnerable to setbacks than funds with many young people who will continue to pay premiums for another few decades. At the same time as the solvency crisis, the minister wants to discuss with the sector “the tenability of the pension system in the long term.”
A painful revelation for politicians and for the sector: the pension legislation from 2006 presupposes there will be a crisis once in forty years. The reality is now once in six years.
Now, how about our Social Security system?
The author is a retired U.S. Air Force officer and a writer.