Published On: Tue, Jul 21st, 2020

A closer look at the effects of pension reform


PHILIPSBURG – Media reports about the reform of the pension system, combined with an advice from financial supervisor Cft have caused some confusion about the real state of affairs.

Minister Panneflek announced that the AOV-reserves (the funds used to pay old age pensions) will be exhausted in 2038 and the Cft expressed concerns that the 11.11 percent increase of the pensions would wipe out the savings that would result from the increased retirement-age.

Is this is a reason for panic among those who will retire around eighteen years from now? Not yet. Let’s take a closer look at the AOV-fund first.

The AOV is a pay-as-you-go system: the premiums it collects in a given year have to be sufficient to pay the pensions in the same year. By law, the fund must maintain reserves that equal something like five to seven months of pension payments.

The AOV and AWW (unemployment fund) currently have combined reserves of around 500 million guilders and those reserves keep growing because the collected premiums outpace the payments. That won’t last forever though: according to Social Affairs Minister Richard Panneflek the AOV-fund will break even in 2028; in that year, the reserves will have ballooned up to 558 million.

After the break-even year, things will go rapidly downhill, because now the fund has to dip into its reserves to pay out the pensions.

St. Maarten has a relatively young population. According to analysts, this is not due to the large number of children but to the influx of immigrants in the eighties and nineties of the last century. These immigrants paid premiums but they did not bring their pension-dependent grandparents along. This allowed the fund to grow.

Unfortunately, the reserves mentioned by Minister Panneflek are not really there: at best there is half or two-thirds of the current 500 million in the bank. This is because the AOV-reserves have been partially used to cover deficits in the ZV (health insurance)-fund, while another part is tied up in government-debts to SZV. This is money SZV has advanced to the government to pay the medical costs for civil servants and PP cardholders.

Before long, the immigrants who came to St. Maarten during the last two decades of the past century will retire and that’s when the AOV-fund will face an annual deficit: the pension payments will exceed the premium income.

Without any measures, the fund would have reached this point in 2024, but the increased pension age postponed it to 2030; the effect of the 11.11 percent increase will cost a couple of years and set 2027 as the break-even year.

From that year on, the AOV-pensions will have to be funded from the reserves. They will last for a while, but not forever: without any measures the fund would be depleted in 2033; by increasing the retirement age the reserves last seven years longer – until 2040 and by increasing the pensions the funds will be depleted in 2038.

What about the Cft’s observation that increasing the pensions will cut into the savings the increased retirement age was supposed to achieve? Not correct, our experts say: the long term effect of the increased retirement age is 1.1 billion guilders positive until 2038; of that amount, 25 percent is used to pay the higher pensions.

The increase in AOV-pensions has an interesting side-effect: the pension for civil servants, paid from the general pension fund APS, will then go down by the same amount, thus increasing the coverage ratio of the pension fund.

There is of course a catch: all calculations are based on the assumption that the AOV-reserves exist. Unfortunately, they don’t. Until the break-even year of 2027 (only a bit more than six years from now) that does not really matter.

To get back to APS: its reserves are not in any kind of trouble. Our experts say that the APS-reserves are not likely to decrease. The fund’s coverage ratio is still slightly about 100 percent.

The retirement age for APS-pensioners recently also went from 62 to 65. The measure took immediate effect. Participants still have the option to retire between the ages of 62 and 65, but that will cut into their pension payments. For the AOV there is a transition period; those who are now 60 or 61 keep receiving their pensions at age 62. Therefore the increased AOV-retirement age will have its first effects two years from now.

In closing a piece of history: in the past, the retirement age in the Netherlands Antilles was 65. After the revolt in Curacao in May 1969, it was lowered, for no apparent reason but under pressure of the labor unions, to 60.