Public Pensions and Political Decision-Making

In a parliamentary democracy, the introduction of a public pension, such as the AOW in the Netherlands, requires a two-fold parliamentary decision: one on the benefit level, and one on the financing system. These include the problem to what extent an intertemporal redistribution within generations should be established. From the start of the pension scheme in the Netherlands in 1956 a uniform benefit level was chosen, together with a — up to a certain maximum income level — premium proportional to income to be paid by those employed. The pension scheme is of the pay-as-you-go (PAYG) kind and allows an intertemporal redistribution of income.1