Prof. Sigrid Hemels, professor of tax law at Erasmus School of Law, writes an expert contribution for ‘Het Financieele Dagblad’ every four weeks. On 14 May they published her article proposing the financial contribution of wealthy pensioners to the General Old Age Pensions Act (in Dutch referred to as AOW).
According to the first poll, the budgetary deficit has increased by € 92 billion due to the corona crisis. This deficit must be restituted at some point, but it is not an option to pass it on to future generations.
At the moment, these costs are mainly borne by the working population due to the levies of taxes and national insurance contributions. Old-age pension contributions of 17.9% are no longer levied after reaching the retirement age. As a result, pensioners pay significantly fewer premiums than people in the working population do. The Old Age Pension Act is based on less wealthy elderly. This made complete sense during the introduction of the Act in 1957, but the elderly are becoming increasingly prosperous over time. In the Netherlands, they are even considered the wealthiest societal group.
Solidarity of pensioners
Prof. Hemels concludes that it is time to abandon the principle that only the working population pays for pensioners' old-age pension. According to Prof. Hemels, bearing capacity is not dependant on age. Wealthier pensioners may, therefore, be asked to show solidarity with their less fortunate peers and younger generations. This can easily be achieved by cancelling the exemption from old-age pension contributions. This way, the tax rate in the first category, including both employed and retired people, is equated to 37.35%. Less prosperous pensioners can be compensated by increasing the income-dependent elderly tax credit.
Double taxed
The idea that current pensioners are subject to double taxation caused by this adjustment is incorrect. The old-age pension contribution is levied through the pay-as-you-go system. This means that the paid old-age pension contribution covers the costs of the year it is paid in and is therefore not personal. Whereas in the past the old-age pension beneficiaries were a small group with a relatively short life expectancy, the size of this group has grown considerably due to the ageing of the population. As a result, the old-age pension costs have risen and are already partly paid for by general taxes.
The proposal made by Prof. Hemels is only a visible step on a path that has already been taken. She expects a lot of resistance from a certain group of elderly, but also believes that a large group of elderly would like to show solidarity with younger generations and therefore understand the fairness of this proposal.