Smarter rules on pensions could mitigate financial risks
Pensions not tailored to the self-employed, working mothers with stagnant salaries and people unable to find work due to incapacity. Pim Koopmans was recently awarded a PhD from Leiden University for his research on these issues and the corresponding financial risks.
Pim Koopmans conducted his research at the Department of Economics of Leiden Law School. He looked at three financial risks people may face throughout their lives; risks that policymakers are seeking ways to address. Using empirical methods, he examined how retirement, having children, and disability affect the way people manage their finances at different stages of their lives.
Insufficient pension for self-employed
According to Koopmans, many people fail to save enough for their retirement: ‘This is particularly true for self-employed people, known in Dutch as "ZZP’ers". Many discover they have less than 70% of their previously earned income once they retire. The government is therefore looking for ways to encourage these workers to build up greater reserves.’
Penalty for having children and incapacity for work
A second group facing financial risks are women who have children and subsequently lag behind on average in salary and career prospects. This is referred to as the child penalty. The third group that Koopmans examined are those who become incapacitated and are unable to work.
Data access
Koopmans studied how these events affected financial choices at various stages of life. His PhD thesis entitled Essays on the Economics of Household Finance and Social Insurance was funded by the Gak Instituut and provides an empirical study. Among other sources, he was allowed to use data provided by the ING bank. ‘I used detailed monthly transaction data that has not been used previously in research on pensions’, he says. ‘The data clearly showed how retirement affects income and spending in the short term, a topic that has not been studied before using transaction data.’
Outdated standard image of households
The results revealed – in line with previous literature – that for many households, the standard life-cycle model used by economists no longer applies. According to the life-cycle model, people spread their spending over their lifetime. It is assumed that they either calculate unexpected changes in income and expenditure in advance or spread them over the rest of their lives. But it appears that individuals, as well as groups of households, now behave differently. This justifies policies that aim to protect people from lifetime risks.
Proposals
When it comes to the self-employed, for instance, Koopmans suggests it would be better if rules on pension accrual were more flexible. This would help to balance the finances of people on low incomes or with mortgages or debts that weigh heavily on their household budgets. It would also help self-employed people. For instance, the research data showed the beneficial effects of being able to withdraw pension already accrued before retirement, in order to use it to pay off a mortgage or a debt that would otherwise weigh heavily on a person’s finances.
Experiments
Koopmans conducted an experiment in which he put certain choices to participants. The results revealed that people are willing to pay for pension products with more simplified tax conditions and that offer the possibility to withdraw reserves that have already been built up sooner. Moreover, the willingness to pay for such pension products increases when they are easy to take out instead of involving a significant administrative burden that self-employed people, in particular, dread.
In addition, Koopmans analysed panel data on the child penalty. Policies could also help to address this issue. To reduce the loss of income of mothers who take on more household tasks and work less, Koopmans suggests childcare subsidies, more generous paternity leave and more flexible working hours.
Finally, Koopmans examined outflow due to incapacity for work using data from the UWV (Employee Insurance Agency). When it comes to incapacity for work, private invalidity insurance schemes do not appear to be more effective in helping more workers return to work. However, they do lead to a greater outflow to full disability and recovery without work. On the one hand, fully incapacitated workers then receive the benefits they are entitled to sooner, but the system also puts a strain on medical re-examination capacity.
Gak Institute
The Gak Institute is a foundation that aims to contribute to the quality of social security and the labour market in the Netherlands by investing in social projects, research and professorships.