Media Briefings

Shattered Dreams: The High Mental Health Costs of Pension Reform

  • Published Date: March 2012

Pension reforms can have serious consequences for the mental health of employees nearing retirement. That is the central conclusion of research by Professor Maarten Lindeboom, Professor Andries de Grip and Dr Raymond Montizaan, published in the March 2012 issue of the Economic Journal.

Their study finds that a recent pension reform in the Netherlands – which has reduced the pensions wealth of public sector employees born after 1 January 1950 – is having a large and persistent effect on rates of depression among employees born after that date who are approaching retirement.

These findings are of great relevance to public policy at a time when most developed countries are revising their pension systems to cope with population ageing and the effects of the financial crisis on public debt. These reforms are typically geared towards extending working lives and reducing the role of defined benefit pensions.

The results of this new study show that a sudden irreversible deterioration of future prospects has an immediate impact on the mental health of employees nearing retirement. This is especially true when their own employer reneges on pre-existing arrangements (violates an ‘implicit contract’) in ways that are difficult to adjust to once one has taken those rules into account in one’s plans.

In the longer run, these mental health effects may translate into somatic diseases. This will not only affect individual wellbeing but will also engender costs associated with depression and worse physical health. The healthcare costs of people who are depressed are about four times higher than those of non-depressed individuals.

Moreover, since there are substantial and persistent negative effects on mental health quickly after the announcement of the reform and long prior to retirement, there are high indirect costs due to the loss of productivity, flawed decision-making and workplace accidents.

   ‘Governments should take these effects and costs into account when redesigning pension policies’, the research team conclude.

The authors examine a 2006 reform in the Dutch pension system where the pensions wealth of Dutch public sector employees born in 1950 (and later) was reduced, but not for public sector employees born in 1949. Prior to 2006, all public sector employees in the Netherlands could retire at age 62 years and three months with a replacement rate of 70% of their average yearly earnings.

As of 2006, those born before 1 January 1950 could continue to retire under the old rules, but for those born on or after 1 January 1950, the replacement rate is lowered to 64%. These younger employees need to work an additional one year and one month to obtain the 70% replacement rate enjoyed by colleagues who may be just a few days, weeks or months older than them.

Since 2006, the researchers have conducted large-scale annual questionnaires among public sector employees who were born in 1949 and 1950. They find rates of depression in 2008 that are up to 40% higher for the 1950 cohort. This large effect on depression rates is remarkable as these employees have not retired yet.

The study finds evidence for the relevance of income effects. But it also seems that the discontinuous assignment rule and the strongly differential treatment of employees born around 1 January 1950 are perceived to be unfair.

The research also shows that the depressive effect is larger for employees whose partners have no own pension income. This suggests that the reduction in pension income plays an important role in explaining the effect on depression.


Notes for editors: ‘Shattered Dreams: The Effects of Changing the Pension System Late in the Game’ by Maarten Lindeboom, Andries de Grip and Raymond Montizaan is published in the March 2012 issue of the Economic Journal.

Maarten Lindeboom is at VU University Amsterdam. Andries de Grip and Raymond Montizaan are at Maastricht University.

For further information: contact Maarten Lindeboom on +31-20-640-3077 (email:; Raymond Montizaan on +31-43-388-3801 (email:; or Romesh Vaitilingam on +44-7768-661095 (email: