ARTICLE
Another Dutch miracle?
Explaining Dutch and German pension trajectories
Markus Haverland, University of Nijmegen, The Netherlands
Summary
This paper compares old-age pension policy
trajectories in the Netherlands and Germany.
These two advanced welfare states have devel-
oped different financial arrangements despite
similarities in policy legacies, political institu-
tions and party systems. Both countries estab-
lished and extended comprehensive pay-as-
you-go financed public pension schemes in the
1950s and 1960s. However, the Netherlands
achieved a fully fledged multi-tiered pension
system with a strong funded component,
while until recently the German system relied
almost exclusively on pay-as-you-go financ-
ing. The Netherlands has, therefore, a finan-
cially more viable and sustainable set of
pension arrangements than Germany, at least
under the current and foreseeable economic
and demographic conditions. The paper
reconstructs the pension trajectories in the
two countries in order to explore the role of
path dependency, political choice and contin-
gency in explaining this divergence. It is
argued that divergence is essentially unrelated
to different strategic choices or variations in
institutional capacities for reform. Instead,
divergence is the largely unintended conse-
quence of a series of incremental decisions in
combination with contingent events and
developments.
Key words
Germany, neo-institutionalism, the Nether-
lands, old-age pensions, path dependency
Journal of European Social Policy 0958-9287 (200111)11:4 Copyright © 2001 SAGE Publications, London, Thousand
Oaks and New Delhi, Vol 11 (4): 308–323; 019633
Résumé
Cet article compare les trajectoires des poli-
tiques menées en matière de pensions aux
Pays-Bas et en Allemagne. Ces deux Etat-
providences matures ont développé des
arrangements financiers différents malgré des
similarités dans la tradition politique, les insti-
tutions et les systèmes de partis politiques. Les
deux pays ont établi et développé des systèmes
publics étendus de pension par répartition dans
les années 50 et 60. Cependant, les Pays-Bas
ont créé un système multi-piliers comprenant
une forte composante de pré-financement
alors que l’Allemagne s’est appuyée presque
exclusivement sur un financement par réparti-
tion. Les Pays-Bas disposent donc d’une archi-
tecture en matière de pensions plus viable et
soutenable financièrement que l’Allemagne,
du moins en tenant compte des conditions
démographiques et économiques prévisibles.
Cet article reconstruit les trajectoires suivies
par ces deux pays afin d’explorer le rôle de la
dépendance de sentier (path dependency), des
choix politiques et des contingences en tant
que facteurs explicatifs de ces chemins diver-
gents. Nous argumentons que cette divergence
n’est pas liée à des choix stratégiques dif-
férents ou à des variations dans les capacités
institutionnelles à réformer. Au contraire, cette
divergence est largement due à des conséquen-
ces non anticipées d’une série de décisions
incrémentales combinées avec des événements
contingents et à leur développement.
Introduction
The Netherlands is widely praised as a model
modern European welfare state. Most of this
 ANOTHER DUTCH MIRACLE?
praise is related to the impressive improve-
ment in labour market performance over the
last two decades (cf. Becker, 2000; Visser and
Hemerijck, 1997). Relatively less attention has
been paid to another element of the Dutch
welfare state, which some experts claim to be
a model for the rest of Europe – the Dutch
multi-tiered old-age pension system. Like most
European welfare states, the Netherlands
introduced a public pension system based on
pay-as-you-go (PAYG) financing in the 1950s.
Unlike most other welfare states, however, the
Netherlands has moved towards a multi-tiered
pension system with a strong funded compo-
nent.1 In the late 1990s, the percentage of
PAYG-financed pensions as a share of overall
pension income was as low as 45 percent,
while it was still at 80–90 percent in most
other welfare states, including Germany. This
hybrid character makes the Dutch arrange-
ment more robust against external develop-
ments. In particular, the system is less
vulnerable to ageing and unemployment,
because of its strong funded component.
Therefore, the Netherlands ‘features a better
balanced mix of various pension systems at
least under the current and foreseeable eco-
nomic conditions’ (CPB, 1997: 248; cf.
Börsch-Supan, 2000: 44; Delsen, 2000).
The development of the Dutch system is not
only of practical relevance for European
policymakers but also raises some important
theoretical questions. The neo-institutional
argument states that policy legacies and exist-
ing political structures powerfully shape the
nature and direction of policy change. Past
commitments and the rules of the game pre-
structure political strategies and constrain the
set of feasible policy options. Policy change is
path dependent and incremental (Pierson,
1994; 2000; cf. Esping-Andersen, 1996). This
is especially the case for old-age pensions: any
significant reform is unlikely due to coordina-
tion effects, large fixed costs and adaptive
adaptation (see next section). Until the early
1980s, the Netherlands and Germany – like
most other welfare states – relied almost 90
percent on a PAYG pension system. Moreover,
309
in both countries the national parliaments
have the competencies to decide upon the
main features of the pension systems; both
countries have coordinated systems of wage
bargaining; and both feature a strong
Christian Democratic party at the centre of
the party system (cf. Esping-Andersen, 1996;
Hemerijck et al., 2000; Keman, 1994; Van
Kersbergen, 1995).
Given similarities in policy legacies, political
and economic institutions, and party systems,
one is inclined to dismiss the neo-institutional
argument and to attribute significantly diver-
gent developments to different political
choices. The comparatively better perform-
ance of the Dutch system seems to point to a
better adaptation to changing demographic
and economic developments. This article
argues, however, that the significant diver-
gence and the comparatively better perform-
ance of the Netherlands are not the result of a
deliberate strategy and radical choices. In this
sense, the case-study confirms the neo-institu-
tionalist view that significant reforms are
unlikely in the case of public pensions. How-
ever, the case-study indicates another way in
which national paths can diverge significantly.
The paper argues that divergence is the result
of the largely unintended effects of a series of
incremental choices. These effects significantly
increased differences in the initial pension
system design. Contingent events and external
developments further strengthened or weak-
ened the unintended and unforeseen effects of
incremental choices. In addition, these contin-
gencies shaped the room to manoeuvre for
policymakers. They were beneficial or disad-
vantageous, enabling or constraining further
reforms.
Pension reform can serve different goals
such as poverty alleviation, income redistribu-
tion, recommodification or the adjustment to
new social needs. This paper will concentrate
on another dimension of pension reform: cost
containment. Cost containment pertains to
measures concentrating on public spending
per se. Such policies can take the form of
reducing benefits, tightening eligibility criteria
Journal of European Social Policy 2001 11 (4)
310
or moving from public PAYG-financed pension
arrangements to private funded pensions.
The remainder of the paper is organized as
follows. The paper first provides the back-
ground to the empirical case-study by intro-
ducing some properties of the ‘public pension
problem’ (second section). The main part of
the paper accounts for the pension policy tra-
jectories in the Netherlands and Germany.
This covers a relatively long time-span, as the
roots for the divergent trajectories of the
1980s and 1990s have to be found in differ-
ences in the initial designs of the 1950s and
1960s (third section). The conclusion (fourth
section) provides a summary of and reflection
upon the main results of the paper.
Public pension systems under
pressure
There is probably no other sector of mature
European welfare states where the pressure to
adjust existing arrangements is so evident at
the same time that the political and economic
constraints on reform are so great. In the
course of the golden age of the welfare state,
governments of all colours gradually but con-
tinuously broadened coverage, reduced the
legal retirement age and increased the replace-
ment rates of their pension arrangements.
PAYG-financed public pensions account for
some 80–90 percent of all pension income in
the European Union. It is now almost univer-
sally accepted that an ageing population seri-
ously endangers the financial viability and
current generosity of these schemes (Chand
and Jaeger, 1996; OECD, 1998; World Bank,
1994).
Given favourable demographic conditions
and the growth in employment and real
wages, PAYG financing was seen as a natural
choice in the 1950s and 1960s. In the Nether-
lands for instance, the real rate of return of
PAYG systems was 5–6 percent annually in
these decades, when capital-funded pensions
achieved only slightly more than 1 percent
Journal of European Social Policy 2001 11 (4)
H AV E R L A N D
(Koopmans et al., 1997; cf. Myles and
Pierson, 2001: 310). But economic and demo-
graphic conditions have changed. Real wage
growth has declined. Unemployment has
increased, as has economic inactivity, espe-
cially among the male population aged 55 and
above. These developments emerged against
the background of fundamental demographic
changes. Life expectancy has increased and
fertility has declined. Ageing and inactivity
among the ‘abled’ population implies for a
given system that there are fewer workers per
pensioner each time, and for any given
replacement rate, this increases contribution
rates (Konrad and Wagner, 2000: 5).
There is a relatively broad consensus among
international economic organizations, national
(economic) advice councils and policymakers
that under the current and foreseeable demo-
graphic and economic conditions PAYG
systems are on average less financially benefi-
cial than funded systems. Average real returns
for physical capital (long-term bonds, equities)
have been significantly higher than average
real returns on human capital (earnings) in
advanced industrialized democracies for the
last two decades (Boldrin et al., 1999: 311).
Rising contribution rates and declining rates
of return of PAYG systems could result in
massive disincentives to supply labour on the
official labour market. ‘Depending on the
elasticity of the tax base, the system may
simply become unsustainable’ (Konrad and
Wagner, 2000: 7). Premium payments to
funded systems will more likely be regarded as
individual savings for an old-age provision
rather than taxes, thereby avoiding to a large
extent negative labour market distortions and
probably promoting more labour participa-
tion (Kuné, 2000: 17).
A partial transition towards a multi-tiered
system, made up of PAYG and funded ele-
ments, has the advantage of balancing the
risks associated with financing mechanisms.
As noted, demographic ageing, lower employ-
ment rates, and slow wage growth negatively
affect PAYG systems. But funded systems also
involve risks. They are vulnerable to inflation
 ANOTHER DUTCH MIRACLE?
and capital market failure. Moreover, though
on average capital market assets yield high
results, these returns are more volatile, and
therefore more risky.2 Especially because the
risks of both mechanisms are negatively corre-
lated, a hybrid system combining both ele-
ments is preferable (e.g. Boldrin et al., 1999;
Börsch-Supan, 2000; Disney, 2000; Konrad
and Wagner, 2000).
There has been a lot of debate in economics
about whether a transition from a PAYG to a
capital-funded system could be achieved in a
Pareto-efficient way. The debate is important,
because if a welfare-increasing transition
could be possible, the losers could be compen-
sated out of the overall efficiency gains.
Summarizing the debate, Konrad and Wagner
conclude, however, that ‘there is no Pareto-
improving transition from PAYG to a funded
system. Accordingly, the discussion about
transition and the appropriate transition path
is mainly a discussion about intragenerational
and intergenerational redistribution’ (Konrad
and Wagner, 2000, 9; cf. Kuné, 2000). Once a
PAYG system has been introduced, practically
speaking all generations are captured – or
‘locked in’ – by an implicit social contract. A
transition would involve major losses. The
generations living during the transitional
period have to pay – in terms of reduced con-
sumption – for the pensions of the preceding
generations while paying – in terms of savings
or reduced consumption – for their own
funded pensions (Kuné, 2000: 28; Myles and
Pierson, 2001).
This coordination effect is a major source of
path dependency. Large fixed costs and adap-
tive expectations are two additional sources of
path dependency in public pensions (c.f.
Pierson, 2000: 254). Most European welfare
states have built up enormous benefit obliga-
tions to the present retirees and the working
population. These commitments constitute
hidden liabilities or implicit debts. Covering
past commitments – or fixed costs – while
simultaneously financing the transition to a
funded system proves difficult; not least
because of the existence of large (explicit)
311
public debts and – for most EU countries – the
Maastricht convergence criteria. The con-
straints on reform become especially evident if
one focuses on the legacy of the adaptive
expectations of the present retired generation.
Reducing replacement rates of present pen-
sioners in order to reduce contribution is diffi-
cult because ‘the current old expected to
receive the present replacement rate, and
adjusted their private savings accordingly. It is
too late for them to revise their intertemporal
allocation of income’ (Konrad and Wagner,
2000: 8).
Given past commitments, adaptive expecta-
tions and the need for intragenerational
and/or intergenerational redistribution, it is
not surprising that pension reform is difficult
in electoral terms. The working population
and current pensioners perceive their pension
entitlements as property rights, since they
have paid premiums. Even in the Netherlands,
with its tax-like financing of a flat-rate basic
pension scheme, many people believe they
participate in an insurance scheme that creates
property rights.
Despite the difficulties of reforming com-
prehensive public pension systems, the
Netherlands has arrived at a multi-tiered
pension system with a strong funded compo-
nent, while until recently Germany has relied
almost exclusively on PAYG financing. The
next section analyses how and why this diver-
gence took place.
Dutch and German pension
trajectories compared
Introduction
The Dutch pension system is made up of three
tiers: a public basic pension (AOW), capital-
funded occupational pension schemes, and
voluntary individual savings (CPB, 1997;
Delsen, 1996; 2000; Kuné, 2000). In the late
1990s, the first tier provided 45 percent of
overall pension income, while the others con-
Journal of European Social Policy 2001 11 (4)
312
tributed 30 percent and 25 percent respec-
tively (Delsen, 2000: 149).The AOW provides
flat-rate benefits to all residents, retired or
not, from age 65 on. The scheme is financed
according to the PAYG principle. Contribu-
tions are paid by employees and the amount is
calculated as a percentage of personal income
(17.9 percent, ceiling: €21,900 in 1999). The
full benefit for a couple is 100 percent of the
net minimum wage (€1,060 in 1999), while
singles get 70 percent. For full benefits, 50
years of residence are required, and for each
year less, the pension amount is reduced by 2
percentage points.
Occupational pensions provide earnings-
related benefits that have to be financed by
funding. Pension assets are held outside the
firm in independent pension funds.
Contributions are typically calculated in order
to achieve a 70 percent replacement rate
including the basic pension after 40 years
(1.75 percent per year). Contributions to pen-
sion funds and interest income from pension
funds enjoy tax exemption. In general,
employers contribute 50 percent or more.
Occupational pensions are negotiated by rep-
resentatives of capital and labour, the ‘social
partners’, and once a sector-wide occupational
pension arrangement is agreed upon, it is
compulsory for all companies of the sector to
join. Company schemes are only permitted
under certain conditions. In the mid-1990s, 87
percent of all employees were covered, the
majority participating in sector-wide pension
funds (Delsen, 2000: 152). The third tier of
the Dutch pension system is made up of vol-
untary saving plans. Life insurance enjoys
favourable tax conditions.
In European comparison, the Dutch multi-
tiered pension system is a strange animal. It
belongs to the few European countries in
which funded pensions provide a significant
source of pension income (see below). The
German system represents the standard
European model (Alber, 1998; CPB, 1997;
Konrad and Wagner, 2000). More than 80
percent of the income of households headed
by a person aged 65 years or older is provided
Journal of European Social Policy 2001 11 (4)
H AV E R L A N D
by earnings-related old-age retirement insur-
ance, ‘Gesetzliche Rentenversicherung’ (GRV)
(Börsch-Supan, 2000). The retirement insur-
ance (public pension) provides not only retire-
ment but also disability and survivor benefits.
It is financed by pay-roll taxes (employers
9.75 percent, employees 9.75 percent, ceiling
€52,000, in 1999). State subsidies compensate
for the cost of benefits not covered by contri-
butions. In 1999, the share of state subsidies
in the overall public pension budget was 26.5
percent, or DM104.4b (Konrad and Wagner,
2000: 3). This subsidy is a substantial amount
of money, absorbing roughly a quarter of the
German federal budget. Pension benefits are
calculated so as to achieve some 70 percent of
the average net income of the insured popula-
tion for the average worker. To achieve this
so-called standard pension, however, contri-
butions have to be paid for 45 years. The offi-
cial retirement age varies between 60 and 65,
depending on sex, years of coverage and
labour market position (employed, disabled,
unemployed). The current average retirement
age is lower (59.5 in 1998, according to
Konrad and Wagner, 2000: 3). Occupational
pensions are not as strongly developed as in
the Netherlands. There is no compulsory
membership of firms in sector-wide schemes.
Only half of the current work force is covered
by occupational pensions, and these pension
supplements do not contribute as significantly
to individual pension income as in the
Netherlands (cf. Behrendt, 2000: 14). In addi-
tion, the financing method of occupational
pensions is in most cases different to the
Netherlands. In particular, large companies
finance occupational pensions out of book
reserves, a commitment by the employers to
pay pensions out of reserves usually reinvested
into the company (cf. Ebbinghaus, forthcom-
ing). Book reserves benefit from tax condi-
tions. As in the Netherlands, there is a
supplementary tier made up of voluntary
private pensions that is supported by the tax
system.
The Dutch and the German pension
arrangements are equally generous, if one
 ANOTHER DUTCH MIRACLE? 313

Table 1 Net benefit as a percentage of (indexed) average net wage during entire careera
One-earner family Single person Two-earner family
Germanyb 69-82-89 78-92-99 78-92-99
Netherlandsc 103 92 80
Notes:
a The comparison includes public and occupational pensions. Note that these figures refer to net

figures, a working career of 40 years, and (indexed) average wage rather than final wage.
b The three numbers assume 0%, 10%, 15% gross occupational pensions as % of average gross wage,

respectively.
c The numbers assume that the overall pension (including the public and occupational pension)

amounts to 70% of the final net wage.

Source: Adapted from CPB (1997: 243).

takes public and occupational pensions
together. There is, however, some variation in
regard to different types of households (see
Table 1).
The negative side of the generosity of the
German and Dutch public pensions is
reflected in the enormous size of accrued
benefit obligations (also called hidden liabili-
ties or implicit debts). These estimates are not
without problems. They are, however, rela-
tively good indicators of the financial con-
straints accumulated by past commitments (cf.
Kuné, 2000).
The real difference between the Netherlands
and Germany is not constituted by the
generosity of their pension arrangements. The
difference lies in the robustness of their
systems under the current and foreseeable
demographic and economic developments.
The Netherlands has a more balanced financ-
ing mix than Germany and greater room to
manoeuvre. This is partly because Germany
has accumulated higher hidden liabilities than
the Netherlands (see Table 2). More impor-
tantly, however, the Netherlands has built up a
large reserve of pension saving stock that had
a value of 141 percent of GDP in 1998.
Especially as a greater share of the pension
funds portfolio has been invested in equities,
the system could benefit from a flourishing

Table 2 Pension liabilities in European countries as % of GDP

Accrued hidden liabilities Projected hidden liabilities (Explicit) public debts
Belgium 75 101 117
Denmark 87 117 58
France 83 112 59
Germany 138 186 61
Greece 185 245 107
Ireland 55 78 52
Italy 157 207 119
Netherlands 103 144 68
Portugal 93 128 58
Spain 93 129 66
UK 68 92 49
Notes:
a Accrued benefit obligations of persons aged over 25 years in public PAYG systems, 1990 (Kuné,

2000: 47).
b Projected benefit obligations of persons aged over 25 years in public PAYG systems, 1990 (Kuné,

2000: 44)
c EMU debts 1999 (Eurostat, 2000).

Journal of European Social Policy 2001 11 (4)

314
stock market. This stock can potentially cover
a substantial share of the accumulated liabili-
ties. There are only a few European countries
with substantial savings, most prominently
Switzerland, Sweden, Denmark and the United
Kingdom. None of them equals the saving
level of the Netherlands (Harrison, 1999).
The following section explores how two
mature welfare states which both started out
with comprehensive PAYG public pension
systems could develop so differently. What
were the roles of path dependency, political
choice and contingency?
The golden age: creating and expanding
collective pension arrangements
The Dutch basic pension scheme, AOW
(1957), and the German old-age insurance
scheme (1957) used the PAYG financing
method. This was not only the most sensible
option under the socio-economic conditions of
the 1950s, but it had the additional political
advantage that current retirees could already
benefit from the system without having con-
tributed to it. The first generation’s gift made
this choice attractive in electoral terms. That
the Netherlands was set on a path towards a
relatively sustainable multi-tiered pension
system was an indirect consequence of the
choice to introduce a basic flat-rate pension
rather than an earnings-related old-age insur-
ance. Yet this was not a strategy to ensure the
long-term viability of the pension system
under different economic and demographic
circumstances. The decision was rather the
result of a long and tedious political struggle,
informed by two competing models, about
what a welfare state should look like: the uni-
versal Beveridge model emphasizing solidarity,
and the selective Bismarckian model focusing
on income and status maintenance.
The Dutch social policy arrangement is a
mix of earnings-related Bismarckian and uni-
versalistic Beveridgian elements. A Dutch state
commission, appointed by the Government-
in-exile during the Second World War, initially
Journal of European Social Policy 2001 11 (4)
H AV E R L A N D
envisaged a universal welfare system. Yet, as
an outcome of a series of political struggle
between Socialist, Catholic and Protestant
parties as well as employer organizations and
trade unions, a fragmented system of universal
‘people’s’ insurance, earnings-related worker’s
insurance and means-tested social provisions
emerged. The General Old Age Pension Act
(1957) that introduced the AOW was the first
comprehensive Dutch policy programme that
followed Beveridgian lines (cf. Kam and
Nyples, 1995). Despite a lot of political con-
flict, the act was adopted by a broad parlia-
mentary majority. A compromise was made
possible because the basic pension scheme was
designed and presented as a ‘people’s insur-
ance’ that blended universal elements with
insurance elements (Kam and Nyples, 1995:
39–42; Van Kersbergen, 1995; Van Oorschot
et al., 1996: 79–83). The basic pension was
expanded in the two decades to come, regard-
less of whether the dominant Christian Demo-
cratic parties governed in coalition with the
Labour party or the Liberal party. The pur-
chasing power of the basic pension benefit
quadrupled between 1957 and 1982 (Van den
Heuvel, 1988: 5–6).
Despite this expansion, the flat rate of the
Dutch basic pension had remained too low to
allow for a reasonable income replacement,
especially for the middle and higher-income
groups. Accordingly, employees pushed for
supplementary occupational pensions. In line
with the Dutch corporatist tradition, the occu-
pational pension provisions were negotiated
between employer organizations and trade
unions. Government regulations enacted in
1947 made the negotiated supplementary
pension provisions and premiums compulsory
for all firms in the sector in order to prevent
the distortion of competition (Kam and
Nyples, 1995: 67). The compulsory character
of the occupational pension scheme resulted in
almost universal coverage for the employed
population (cf. CPB, 1997: 240). By 1953,
roughly two-thirds of the relevant target
group were covered by occupational pensions
(Nelissen, 1994: 13).
 ANOTHER DUTCH MIRACLE?
In contrast Germany followed a relatively
pure conservative and corporatist path, using
social insurance to serve the goal of income
maintenance. All major social policy pro-
grammes (unemployment, sickness, disability,
and old age) were designed according to the
Bismarckian model. The Christian Democratic
party, the dominant political force in the
1950s and 1960s, advocated this model. The
German Social Democratic party was initially
more attracted to the Allied plans to introduce
a united and universal system along Beverid-
gian lines. The retirement insurance enacted in
1957 by the Christian Democratic–Liberal
Government provided rather generous bene-
fits, however. Moreover, pension benefits were
indexed to gross wages, ensuring that pension-
ers would benefit from a general increase in
prosperity. Therefore, the Social Democratic
parliamentary opposition also voted in favour
of the reform (Van Kersbergen, 1995:
111–16). The 1972 reform initiated by a
Social Democratic–Liberal government and
enacted with the support of a Christian
Democratic opposition further expanded the
generosity of the scheme by introducing the
opportunity to retire before 65. Since these
early retirement options were offered without
direct adjustment of benefits, many workers
took this opportunity, leading to a drop of 36
months in the average retirement age within a
few years (Börsch-Supan, 2000: 25).
Since the German scheme was earnings-
related it provided the entire long-term
employed population with reasonable replace-
ment rates. This decreased the incentives for
supplementary pensions. Although in both
countries workers argued for additional
schemes, the pressure was much greater in the
Netherlands because, as noted, the Dutch flat-
rate pension system did not provide sufficient
income replacement, especially for middle and
higher-income groups. It was this difference in
the initial design that put the Netherlands on
a path towards a multi-tiered system (for the
general argument, see Myles and Pierson,
2001).
That the Dutch pension system has a much
315
larger funded component than the German
one at the turn of the millennium is not only
related to differences in coverage and the aspi-
ration levels of occupational pension pro-
grammes, but also to the way occupational
pensions are financed. Again, Germany and
the Netherlands made different decisions in
this regard; and it is fair to say that at that
point in time it was by no means clear that the
Dutch decision would turn out to be finan-
cially more beneficial than the German one.
The Dutch law stipulates that the assets
backing occupational pension obligations
must be held outside the sponsoring firm by
independent pension funds. The reason for
this was that retirees should not be dependent
on the fate of their company. In Germany, in
contrast, the tax system provides an incentive
for the sponsoring firm to hold pension assets
within the firm as book reserves rather than in
independent pension funds. The reason for
this was that book reserves are in effect a
cheap source of financing for the company
(CPB, 1997: 241).3 Especially in the years of
reconstruction, German companies were keen
to use these schemes for internal financing
(Schmähl, 1997: 110).
In short, the initial pensions designs were
the outcomes of political struggles involving
essentially similar political forces in both
countries. Compromises were found, but these
compromises took slightly different forms.
PAYG-financed pension schemes were intro-
duced in both countries, but their benefit for-
mulae varied. Their paths of development
unfolded differently as the differences in the
benefit formulae resulted in different degrees
of pressure for supplementary pension
schemes. The Dutch decision to make occupa-
tional pensions, once negotiated, compulsory
for the whole sector and to base them on
capital funding further contributed to the rela-
tively great importance of occupational pen-
sions. While these divergent decisions were
made for good reasons, it was not anticipated
that under the conditions of increased interna-
tionalization and favourable capital markets
the reliance on capital funding in the Dutch
Journal of European Social Policy 2001 11 (4)
316
case would be more beneficial than the
German solution.
The 1980s: parametric reforms
The 1980s were years of cost containment,
and public pension retrenchment occurred in
both countries. The emerging multi-tiered
system in the Netherlands made this retrench-
ment easier, however. Both countries made
parametric reforms, i.e. they manipulated the
parameters of the existing pension arrange-
ments rather than changing the system (Chand
and Jaeger, 1996: 22), but the parametric
reforms in the Netherlands had transitional
consequences: they reinforced the move
towards more funding.
The occupational tier of the Dutch system
was already implicitly strengthened in the
1970s by linking the minimum wage (and, by
extension, related social benefits) to contrac-
tual wage development in the private sector.
This means that incidental wage increases are
not included in the adjustment process.
Because the defined maximum benefit of 70
percent has remained unchanged, the basic
pension share of the defined pension benefit
has declined over time, while the occupational
pension share (and with it the importance of
funding) has risen. This process has been
described as the gradual privatization of the
basic pension (Delsen, 1996: 119).
In the 1980s retrenchment of the basic
pension scheme further contributed to the
increasing importance of occupational funded
pensions. In 1982, a Christian Democratic–
Liberal government came to power and made
an agreement with trade unions and employer
organizations (the so-called Accord of
Wassenaar). In accordance with this agree-
ment, social policy reform was not only
geared towards reducing public spending but
also towards supporting wage moderation.
Social contributions for employees had to be
reduced in order to compensate at least partly
for more modest growth in wages. Social ben-
efits had to be cut accordingly, because it was
Journal of European Social Policy 2001 11 (4)
H AV E R L A N D
also agreed that public deficits should be
reduced (Visser and Hemerijck, 1997). In the
aftermath of the accord, wage development
was de-coupled from minimum income, and
thereby from social benefit development.
Minimum wage and social benefits including
the basic pension scheme were only adjusted
by 1 percent in 1983, cut by 3 percent in
1984, and frozen from 1985 to 1989 (Green-
Pedersen, 2000: 90–2).
The suspension of the linkage rule resulted
in substantial cuts. Delsen calculates that
together with the freeze in benefits between
1993 and 1995 (see below) the size of the
basic public pension as a percentage of the
average gross salary decreased by 25 percent
between 1980 and 1998 (Delsen, 2000: 151).
It is worth noting that this significant
retrenchment was achieved without a direct
attack on the basic pension scheme. In the
1980s and 1990s, unemployment benefits and
disability pensions were repeatedly scaled
back, and unemployment and disability
benefit levels as well as child allowances were
significantly curtailed (Green-Pedersen, 2000;
Van der Veen and Trommel, 1999). However,
the government shied away from a direct
attack on the basic pension system (Delsen,
1996: 120). Such an attack would probably
have caused a lot of conflict as universal
public pension programmes usually enjoy
great public popularity (Kitschelt, 2001).4
Therefore the cut in basic pensions was indi-
rect, forming part of an overall restructuring
of the Dutch labour market and the social
security system agreed in Wassenaar that
aimed at generally accepted goals such as
sound public finances, the reduction of labour
costs and, later, reducing high unemployment.
Besides framing, the government employed
two other mechanisms to avoid the blame that
a direct attack on the basic pension scheme
would have caused: obfuscation and compen-
sation (Pierson, 1994: 19–26). De-linking
minimum wages (and implicitly social provi-
sions) and wage development was a rather
technical procedure. Also, deciding not to
apply the law in consecutive years (the
 ANOTHER DUTCH MIRACLE?
‘linking’ law) is subtler than introducing a
new law, though the effect in terms of welfare
cuts can be more severe in the former case.
The opposition of affected groups was also
diminished through compensation. Those
depending solely on the basic scheme, the so-
called real minima, were compensated by one-
off payments which were rather small but had
symbolic value as these groups attracted sig-
nificant attention (Green-Pedersen, forthcom-
ing). For the participants in occupational
funds, the AOW retrenchment did not matter
in financial terms because the defined benefit
target of 70 percent (AOW plus occupational
pensions) did not change. Relative losses in
basic pensions were compensated by the occu-
pational tier, which increased in importance.
The latter points to the room to manoeuvre a
government can enjoy within a multi-tiered
pension arrangement. It allows for a gradual
reduction of public responsibilities at the
expense of the occupational pension scheme.
Public pensions were not only retrenched in
the Netherlands, but also in Germany. This
was accomplished by both the Social
Democratic–Liberal coalition (1969–82) and
the Christian Democratic–Liberal coalition
(1982–98). In 1976 the government planned
to retrench pensions in a rather direct way.
This attempt ended, however, in enormous
public protest, demonstrating the enormous
difficulty of retrenchment (Nullmeier and
Rüb, 1993: 117–23). Impressed by what
became known as the pension debacle, policy-
makers switched to incremental, relatively
invisible, ad hoc measures for the next decade.
Annual pension adjustments were postponed;
the calculation base for adjustments was
changed several times; eligibility criteria for
the disabled and older unemployed were tight-
ened; and in a number of years the govern-
ment deviated from the principle of
gross-wage adjustment by setting pension
increases at discretionary lower rates (Alber,
1998; Nullmeier and Rüb, 1993).
The mid-1980s can be characterized by a
changing perception of the public pension
problem that paved the way for the more
317
significant reform of 1989, which took effect
in 1992 (the 1992 reform). There was an
increased awareness of the consequences of
demographic change; economic policy á la
Keynes – which would justify public social
spending under certain conditions – was out
of fashion; and Germany’s mass-unemploy-
ment was persistent, despite economic growth.
Against this background the preferences of
government and opposition converged
towards the need for a more radical reform,
but still leaving essential elements of the
public pension scheme intact. The 1992 reform,
adopted by a broad parliamentary majority in
1989, abandoned the principle of gross-wage
adjustment that was already weakened by ad
hoc measures. Benefits were now adjusted to
the development of net wages. Rising taxes
and social contributions would be accompa-
nied by lower pension claims. The reform also
introduced slightly lower replacement rates. In
addition, it increased the reference retirement
age for all categories to 65 and diminished the
early retirement incentives built into the 1972
reform (Börsch-Supan, 2000: 33; Nullmeier
and Rüb, 1993; Schmähl, 1993).
The various incremental measures and the
1992 reform amounted to a rather radical
retrenchment of the public pension schemes.
Alber has calculated that the standard pension
is now 22 percent less than it would be if the
pre-1977 legislation were still in effect (Alber,
1998: 24). This is about the same magnitude
of retrenchment as in the case of the Dutch
basic pension system. This similarity is espe-
cially surprising because cuts in public
pensions could not ‘automatically’ be compen-
sated by increases in occupational pensions.
What then explains the surprisingly large
degree of German pension retrenchment?
It is important to repeat that the degree of
retrenchment was to some extent invisible. As
Alber has pointed out, the size of the welfare
cut is significant in comparison with the hypo-
thetical condition that would have emerged
without cuts. This is a theoretical curtailment
that does not have the potential of creating a
lot of protest from affected groups. This is
Journal of European Social Policy 2001 11 (4)
318
particularly the case because, despite the cuts,
the purchasing power of a standard pension in
1996 was still 13 percent higher than it was in
1975 (Alber, 1998: 31). Moreover, the chang-
ing adjustment procedure, the most substan-
tial and immediate cost-control measure, was
rather technical in nature. In addition, the
most visible harmful measures – the increase
in retirement age and the age-specific adjust-
ment factors – were to be phased in in 2001
and completed in 2012, leaving most current
retirees unaffected.
Given the electoral sensitivity of pension
retrenchment, as proved by the 1976 pension
debacle, it is not surprising that the govern-
ment ensured a broad parliamentary consen-
sus for the more radical 1992 reform. The
latter was important because the blame for the
welfare cuts could be shared with the Social
Democratic opposition. In addition, the gov-
ernment was also persuaded that the reform
outcome should be sustainable even under dif-
ferent parliamentary party constellations
(Nullmeier and Rüb, 1993: 206–7). The Social
Democratic party agreed to participate in the
reform process because it had learned that
retrenchment measures, in particular the link-
age to the net wage development, were neces-
sary to keep the system financially viable.
Though this reform was more radical than
the preceding ad hoc measures, it did not
violate the PAYG financing principle. New
provisions patched up the public pension
system to ensure its sustainability. Both coun-
tries were neither willing nor able to more
fundamentally transform their pension
arrangements. They implemented parametric
reforms, manipulating only the parameters of
existing pension arrangements. The difference
between the Netherlands and Germany was,
however, that the Dutch reforms had a transi-
tional effect, pushing the country further
along the path towards more funding.
The 1990s: good luck – bad luck
The German 1992 pension reform enacted in
Journal of European Social Policy 2001 11 (4)
H AV E R L A N D
1989 could have ensured the financial viabil-
ity of the German PAYG for the decade to
come. However, less than one hour (sic) after
the pension reform was adopted by the
German parliament, East Germany opened its
borders! The subsequent German unification
process caused a substantial external shock to
the newly modified pension arrangements as
the initial economic boom turned into a reces-
sion. Most importantly, rising inactivity
reduced the financial base of the scheme. In
the former East Germany, the number of regu-
larly employed people dropped by 2.3m
between 1990 and 1993, a decrease of 28
percent. The government strategy to cope with
unemployment by directing a large number of
older workers from the former East Germany
into early retirement schemes further wors-
ened the financial viability of the German
pension system. Moreover, until 1995, pen-
sions in the former East Germany were
upgraded in cases where the recalculation of
East German pensions in line with West
German law led to lower pensions compared
to the old entitlements. Additional transfers
made up the difference, amounting to DM6b
a year, mainly covered by the pension budget
(Deutsche Bundesbank, 1995: 22). Unification
also cast a shadow on future attempts at more
radical reforms. Because employees in the East
participate even less in occupational pensions
than their West German counterparts and
have accumulated less private savings, any
transition to funding implying lower replace-
ment rates of public pensions would be espe-
cially difficult for Easterners to bear.5 This
situation will only slowly change because the
accumulation of savings requires considerable
time.
It is not easy to overestimate the negative
impact of the German unification on the
financial viability of the German pension
system. According to calculations by the
Deutsches Institut für Wirtschaftsforschung
(DIW), the German pension system would
have produced a yearly surplus in the 1990s,
despite high unemployment, if it had not been
required to pay pension benefits to pensioners
 ANOTHER DUTCH MIRACLE?
in the former GDR (Deutsches Institut für
Wirtschaftsforschung, 1997; cf. Deutsche
Bundesbank, 1995).
The external shock of unification as well as
the prospect of further demographic ageing
kept pension retrenchment on the German
political agenda, especially as both drive up
contribution rates, which is broadly perceived
as harmful to economic growth and competi-
tiveness. In 1996, the Christian Democratic–
Liberal Government adopted a pension reform
that speeded up the gradual increase in the
retirement age from the original period of
2001 to 2012, to 1997 to 2001. In 1997, the
same Government adopted the 1999 pension
reform act that included a demographic factor,
reducing benefit increases from 1999. This
would eventually result in an old-age benefit
of 64 percent for the standard pensioner com-
pared with a current level of almost 70
percent. The 1999 reform act was the first sig-
nificant policy change in public pensions that
was not supported by the major opposition
party in parliament (Alber, 1998: 24; CPB,
1997: 249; Meyer, 1998).
In the 1998 federal election campaign, the
Social Democratic party therefore strongly
objected to the benefit reductions implied by
the 1999 reform act. Accordingly, when the
Social Democratic party won the election, the
benefit reduction elements were reversed.6
However, the proposals of the new govern-
ment, a coalition between the Social Democrats
and the Green party, were also geared towards
retrenchment. The government almost imme-
diately decided to index pension benefits to
inflation rather than net wage growth for two
consecutive years. Moreover it also proposed
a pension formula that would reduce the ben-
efits for the standard pensioner to 64 percent.
Finally and most importantly, for the first time
in German history, the structural deficiency of
the PAYG system – that is, its vulnerability to
demographic ageing and inactivity – has per-
suaded a major government party to propose
a partial transition to funding. Employees
would be obliged to undertake private
savings, starting with 0.5 percent of the gross
319
wage in the year 2001 and reaching 4 percent
in 2008.
These government proposals were fiercely
criticized. Trade unions and some Social
Democrats objected to the benefit reductions
and the partial transition to private savings,
especially as the latter must be financed by
employees without contributions from employ-
ers. At this time the Christian Democratic
party also opposed the retrenchment implied
in the reform. It now ‘acted’ as the defender of
the welfare state. A situation emerged that can
be characterized by the electoral competition
of two equally credible advocates of the
welfare state (Kitschelt, 2001). The opposition
party takes the chance to blame the govern-
ment party for cuts it would itself probably
have proposed if it were in government. The
party in government has to fear electoral
losses to the benefit of the other if it were to
go alone and retrench radically, leading to a
search for consensus. Against this background
the Social Democratic party conceded to many
objections made by the Christian Democrats,
resulting in a less radical reform than initially
intended. The compulsory character of the
private savings has been dropped and gener-
ous state subsidies will be provided to stimu-
late private savings. Still, when the reform was
adopted in May 2001, the Christian Demo-
cratic opposition party voted against it in par-
liament, as did the Christian Democratic-led
German states in the Chamber of States gov-
ernment (Bundesrat). The first transitional
reform, a step towards more funding, could
not be based on the broad parliamentary con-
sensus that characterized the earlier major
reforms of 1957, 1972 and 1992.
In the 1990s, the Netherlands had the luck
of being on a more favourable path than
Germany. The Dutch welfare state did not
have to absorb an external shock comparable
to German unification that has damaged the
success of the 1992 reform and has seriously
constrained further reform efforts. It was also
important, however, that the greater reliance
of the Netherlands on capital funding proved
beneficial under the economic and financial
Journal of European Social Policy 2001 11 (4)
320
conditions of the 1980 and the 1990s, and
especially in the last years of the millennium
(see below). In the first half of the 1990s,
however, the Christian Democratic–Labour
Government, which came in power in 1989,
further retrenched the Dutch public pension
system. Again, retrenchment was indirect, and
it was related to increasing concerns about
low employment rates. In this context, a con-
tingent system of linking wage development
with minimum income/social benefit develop-
ment was introduced in 1992. If the ratio of
the number of benefit recipients (inactive) to
the number of employed persons (active) – the
so-called 1/A ratio – rises above 82.8, the legal
minimum income and accordingly social bene-
fits will not be linked to contractual wage
development. This was again a rather techni-
cal measure, which ensured a low level of
politicization. The linkage mechanisms sur-
vived the change in government from a
Christian Democratic– Liberal coalition to the
so-called purple coalition made up of the
Labour party and two liberal parties (VVD
and D66) in 1994, which has been confirmed
in 1998. This coalition is very broad in socio-
economic terms since it covers almost the
whole Left–Right spectrum of the Dutch party
system. In 1993, 1994 and 1995 the govern-
ment froze the legal minimum wage and social
benefits because the I/A ratio had risen from
81.4 in 1992 to 85.8 in 1994. Since 1996,
however, the linking is restored reflecting the
positive labour market developments (Visser
and Hemerijck, 1997: 141–8).
The Dutch employment success therefore
also influenced Dutch pension developments.
Moreover, overall economic performance is
also reflected in increasing government rev-
enues. The 1999 budget was the first one for
25 years to produce a surplus, and the stock
of public debts is decreasing quickly. These
conditions provided room to manoeuvre to
improve the financial position of those solely
dependent on the basic pension schemes, by
introducing income tax relief for these groups
which took effect in 1995 (Delsen, 1996: 121;
Kam and Nyples, 1995: 186). In addition, the
Journal of European Social Policy 2001 11 (4)
H AV E R L A N D
positive financial situation also enhanced the
capacities to finance a further transition
towards funding. In 1998, the purple coalition
introduced the partial funding of the Dutch
basic pension scheme. The prime reason for
this step was to curb employees’ contributions
to the basic pension scheme, which have risen
significantly over the years (1957: 6.75
percent; 1980: 10.25 percent; 1999: 17.9
percent). The 1998 law stipulated an upper
contribution limit of 18.25 percent of income
for wage earners. In order to offset higher
pension costs in the future, the government
will set aside an amount of money annually
until 2020. The law entails the estimation that
when expenditure peaks in 2040, the govern-
ment will pay approximately 31 percent of the
total expenditure (Tweede Kamer der Staten
Generaal, 1998; cf. Green-Pedersen, 2000:
91).
The beneficial economic conditions in com-
bination with the broad Left–Right coverage
of the incumbent government made possible
the broad parliamentary consensus for these
decisions. In the 1990s, the Netherlands con-
tinued its incremental but steady path towards
more funding. Cost containment does there-
fore not figure high on the Dutch political
agenda. In contrast, Germany is still stuck on
a path requiring austerity and retrenchment.
Conclusions
This paper presented the case of two mature
welfare states that developed comprehensive
PAYG-financed pension schemes in the golden
age of the welfare state. In the course of the
last decades, both pension systems have devel-
oped quite differently, however. While the
Netherlands has transformed its system into a
fully fledged multi-tiered pension system, the
German system still relies heavily on PAYG
financing. Under the current and foreseeable
demographic and economic conditions, the
Dutch system is therefore financially more
viable and sustainable than the German system.
 ANOTHER DUTCH MIRACLE?
The paper argues that this divergence is not
the result of differences in institutional con-
straints. Nor is the divergence primarily the
outcome of radical political choices. Given the
better performance of the Dutch system, one
would have expected that Dutch policymakers
had more correctly and radically anticipated
economic and demographic changes. Choices
were incremental, however, and – until the
late 1990s – based mainly on other considera-
tions. In the Dutch case the effects of these
decisions provided a better fit with the chang-
ing environment only by accident. Paths
unfolded differently after the initial divergent
decisions – flat rate v. earnings-related pen-
sions – were taken in the 1950s. Choices were
incremental, but in the long run, the cumula-
tive effects of incremental choices resulted in
more radical change. Divergence arises
because the Dutch incremental decisions of
the 1980s had a transitional effect, while the
German reforms were parametric. Incremental
change was accelerated by contingent develop-
ments in the late 1980s and the 1990s. A case
in point is the beneficial impact of the flour-
ishing capital markets of the late 1990s on the
Dutch pension arrangements. Successful
reforms can also be derailed by disadvanta-
geous events, as the German reform of 1989
and German unification demonstrates.
Acknowledgements
Earlier versions of the paper have been pre-
sented at the Annual Meeting of the Dutch
Political Science Association in Veldhoven
(2000) and at the World Congress of the Inter-
national Political Science Association in Quebec
(2000). I would like to thank the participants
of these workshops as well as Karen Anderson,
David Cameron, Lei Delsen, Ian Gough,
Christoffer Green-Pedersen, Patrik Marier,
Hans Keman, Kees van Kersbergen, Sanneke
Kuipers, Stein Kuhnle, Wim van Oorschot,
Bart van Riel, Christian Toft and two anony-
mous referees for their valuable comments.
321
Notes
1 In the case of funded schemes, employees pay
part of their (labour) income into a fund of
financial assets. Retirement pensions are paid
out of current capital income, originating from
investment revenues (interests) and by selling
assets (Kuné, 2000: 16).
2 Another problem associated with capital market
failure is that with a transition to funded systems
there are many buyers now but the situation will
change in the future when all the retirees will
wish to sell their stocks for their pension income.
Then the number of buyers relative to the
number of retired people might be very small
resulting in a reduction in the value of the stock.
3 Currently 75% of the German occupational
schemes are based on book reserves. Pension lia-
bilities are reinsured by the Pension-Sicherungs-
Verein (CPB, 1997: 241).
4 This has been clearly shown in the mid-1990s.
The mere suggestion by the leader of the
Christian Democratic party that the Dutch basic
pension scheme could not be sustainable and
that benefits should be frozen for a number of
years contributed to a historical defeat in the
1994 elections and the entry of two pensioner
parties to the Dutch parliament (Metze, 1995:
217–48).
5 I would like to thank Patrik Marier for bringing
this argument to my attention.
6 The analysis of the recent developments in
Germany is primarily based on the Financial
Times Deutschland, Handelsblatt and
Süddeutsche Zeitung.
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