Optimizing the life cycle path of pension premium payments and the pension ambition in the Netherlands

Pension premium rates and pension benefits are independent of age or family situation in the second pillar of the Dutch pension system. In a life cycle model calibrated on Dutch data we investigate the optimal arrangement of pension premiums and benefits taking into consideration two factors: the fact that incomes generally rise with age and the presence of children in the early years of the household. Our analysis points out that due to these factors lifetime welfare can be raised by a delay of pension premium payments towards later working ages. A lower pension ambition further enhances lifetime welfare. Taking these factors into consideration when designing the pension system increases lifetime welfare by an amount that equals a 3.4 percent increase in lifetime consumption if no borrowing constraints are imposed and 2.8 percent if, more realistically, we impose these constraints. Family size (i.e. number of children) has a large impact on optimal pension premiums and optimal pension ambition. Policy conclusions from our results should carefully weigh the calculated welfare gain against possible negative and positive effects of non-modelled aspects.