The Fiscal Subsidy on Pension Savings in the Netherlands

The Netherlands belongs, with its three pension pillars and its substantial funding, to the leading group of countries in Europe with a solid pension system. But tax facilities for pension savings have become an expensive business for the Dutch government. It is now one of the largest 'tax expenditures'. Through the deduction of pension and annuity contributions the Treasury will lose an estimated 9.6 billion euro in 2003 (2.1 percent of GDP). This is three times as much as in 1990. Balancing the pension contribution deductions, the pension benefits that will be paid out in the future will be subject to taxation. Pension incomes will however be taxed at a relatively low rate and, in addition, the delay in tax payment (investment returns of pension funds are exempt from taxation) provides an interest advantage. Our calculations for the year 2000 show that current taxation on a cash-flow basis means on balance a major loss to the Treasury (compared to the benchmark). At a relatively low real return on the pension capital, the fiscal subsidy in terms of net present value comes to 7.7 billion euro (1.9 percent of the GDP). For the year 2003 we estimate an even higher amount