The Dutch pension system and implicit labour taxes

Pensions have been one of the hottest topics of the past decade. Due to the institutional pay-as-yougo (PAYG) pension system designs a lot of OECD countries will face the imminent consequences of population ageing, leading to large future government deficits. Both popular and academic literature suggest pension system reforms in order to deal with this threat. Several academic papers suggest the reform to a more funded pension system in order to make the pension system more financially stable, such as the Dutch pension system that constitutes both unfunded and funded characteristics. However, the topic of pension systems is complex. Pension systems affect a lot of issues beside the major financial risks and government deficits, such as the labour market. Since mandatory pension contributions are needed by the government to provide pension benefits, one could consider these mandatory pension contributions as payroll taxes on labour efforts. This will constitute an implicit tax on labour, which is larger or smaller depending on the institutional design of the pension system. The hypothesis of this thesis is that the Dutch hybrid PAYG-funded pension system is more efficient than pure PAYG pension systems. In this thesis the reader will see how a tax-benefit link will increase labour market efficiency. Besides a tax-benefit link pension systems that are fairer in terms of pension contributions and benefits over the lifetime of the individual also tend to be more efficient in terms of labour market efficiency. After a theoretical elaboration on this topic the model will be calibrated by means of a sensitivity analysis.