October 12, 2014
Economists usually think it is a good to try to make spending countercyclical. This means that we want more spending when the economy is weak and less when the economy is strong.
Traditional defined benefit pensions in the United States at least partly fit this bill. They do sustain benefit levels in a downturn. In addition, their funding formulas average the impact of market swings so that they don’t have to have large increases in contributions if the economy goes into a downturn and their funds take a hit.
A NYT piece by Mary Williams Walsh told readers that pensions in the Netherlands work in the opposite way and that we should all follow their model. The piece tells readers that the Netherlands runs pensions the way they should be run. It celebrates the fact that its method would amplify the impact of cycles:
“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.”
This is a policy that had something for everyone. Not only did it reduce the money available to retirees to support themselves, it also took money away from firms to finance investment. It also had something for the young. By reducing demand in the economy, it put more of them out of work.
If someone wanted to do damage to the Netherlands economy it would be difficult to envision a more effective method short of war. Incredibly the economists in the Netherlands all agree that this is the best approach, at least according to the article. It quotes Theo Kocken, an economist who started a risk analysis firm:
““But all economists now agree. The expected-return approach [which requires this pro-cyclical spending and contribution pattern] is a huge economic offense, hurting younger generations.”
The pension policy promoted by Mr. Kocken, and apparently all of Netherlands’ economists, might help to explain why GDP in the Netherlands is still 2.0 percent below its 2008 level, as compared to 7.6 percent higher in the United States. It’s not clear how he would tell younger generations that shrinking the economy is good for them, but economists in the United States usually think that a larger economy is better — unless the shrinkage is due to voluntary leisure. (The U.S. accounting system leads to much less pro-cyclical funding patterns, although it can be improved.)
As a practical matter, there are many deficit cultists in Europe who have insisted on austerity as the best mechanism to get out of the recession. The result has been economic stagnation and ever falling inflation rates that may soon turn negative. Folks that believe in basing theories on evidence would view their policies as a disastrous failure. However, like creationists in the United States, many European economists apparently don’t let evidence affect their views of the economy. Most people would not consider that an approach to be emulated in the United States, but apparently the NYT is promoting creationist economics, at least when it comes to pensions.
Addendum:
For those interested in bringing the impact of the Netherlands’ austerity down to a more personal level, the loss in wages and other income due to its economy growing less rapidly than the U.S. economy comes to roughly $4,700 per person a year, or $18,800 a year for a family of four. This can be thought of the country’s “austerity tax.” But at least they don’t have to worry about underfunded pensions.
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