Eduardo Rodríguez Rovira -- Contributory pensions and notional accounts

"the Commission notes the need to preserve and reinforce the principle of contributory nature, understood as the existence of a balanced relationship between the amount of the benefit granted and the contribution effort previously made by each worker".  This is the beginning of recommendation 11 of the Toledo Plan Report, recently approved by Congress

The principle of contributivity is qualified by the principle of solidarity allowing for the improvement of lower pensions and avoiding the negative consequences of the gender gap. Caps on higher pensions also meet this criterion.

These two principles are essential in the current Spanish pension system. It is repeated in recommendation 5, Adjustment of contribution bases and periods, which reaffirms that the system responds to an essentially contributory logic combined with a strong solidarity component and recommends that all future reforms should maintain a balanced combination of these principles.

The principle of contributory service is reinforced by extending the period of time used for calculating the regulatory base from 15 to 25 years. The report hints at increasing the contribution period needed to reach 100% of the regulatory base to the full working life or 40 years, which would in most cases lead to a reduction in the amount of future pensions.

Universal doctrine considers that the essence of pension systems, unlike social assistance systems, is contributory nature. The state withholds from workers' salaries an amount that entitles them to receive a pension in the future, which formally in the pay-as-you-go system goes to pay the pensions of those already retired, and in the funded system goes to a real account that with the interest earned will be given to the contributor upon retirement.

In line with the widely held view of a clear distinction between contributory and non-contributory pensions, the Report notes that pensions "... are not a separate category of pensions...".non-contributory benefits and services of a universal nature are financed through State contributions to the social security system" and also states in the first recommendation, which concerns the source consolidation that "only the full assumption of the minimum funding by the General State Budget is pending".

The number of recipients of non-contributory pensions was 451,796 people on 1 January 2020. In 2021, this group will have their annual pensions revised by 1.81 PPP3T, while for contributory pensions (around 10 million recipients), an increase of 0.91 PPP3T has been set, like this year's figure. We strongly agree, firstly, with the updating of contributory pensions. Secondly, we advocate a higher increase in the low non-contributory pensions, as well as the supplements, this year 1.8% also, to minimum pensions (7,075 million € in 2021), but we are very pleased that the concepts are separated so that the minimum increase in contributory pensions is clear.

There have been comments with which we do not agree at all that in the present circumstances of economic crisis it is a contradiction in terms to make such upward revisions, when the budget expenditure is growing by no less than 19.4%. It will be necessary to analyse the large number of budget items that are increasing at rates far higher than those for pensions. Budgeted social security expenditure, the largest item in the budget, is €172.429 billion, with a growth of 4.31TDP3T. the revaluation of pensions for inflation at 0.91TDP3T is obviously a small component, compared to the 4.31TDP3T or 19.41TDP3T noted above.. The revaluation of contributory pensions is by no means the cause of the galloping state deficit and debt.

As we have seen above, the Report is clearly against social security contributions continuing to cover non-contributory expenses, not only for doctrinal reasons, but also because they cause the social security deficit. These include contribution reductions to encourage young people to join the system or to keep certain groups in employment, aid to productive sectors by bringing forward the retirement age, etc. The Spanish pension system, which is essentially contributory, will be cleansed of the tangle of social benefits.

One of the most consistent criticisms made of these recommendations is that it avoids entering once again into a radical reform of a system that has become obsolete with enormous problems of sustainability, a system that most developed countries are abandoning. But the very clear definition of a contributory system as made in the Report facilitates the leap of modernisation that many countries such as Sweden, Poland, Italy, Brazil, etc. have made in recent years towards a system of notional accounts, which would require changing the defined benefit system (% salary at the end of working life) to a defined contribution system. It seems very simple, but Sweden took more than a decade to reach a political agreement and set up a transitional generational change (new system for under 35, mixed system for the 35-55 generation, and old system for over 55).

In this system, social contributions are formally paid into a notional account, to which an interest rate is attributed, linked to long-term GDP or wage growth and at least inflation, the results of which will be paid to the person concerned upon retirement, usually as an annuity, while insuring for future inflation and taking into account the life expectancy of his or her age cohort. It officially remains a pay-as-you-go system as the financing of your retirement comes from the social benefits of those who are working.

The advantages of the system are clear in terms of transparency, information to stakeholders (recommendation 7 of the Report) and greater difficulty in manipulating the accounts through new legal or regulatory initiatives. Transition costs are relatively low, it facilitates flexible retirement and its prolongation (recommendation 12 of the Report), it is compatible with improvements in minimum pensions, which would be paid for with taxes, and it is considered to be a fairer system, as you receive as much as you contribute. Some studies point out that applied to the current Spanish situation it would mean a reduction of 15% in the average pension of new retirees. But currently all the parametric measures under consideration for incorporation take into account a similar reduction in future pensions, whose rate of replacement of the first pension by the last salary is considered to be among the most "generous" in countries with public pension systems. Failure to adopt measures to solve the present and future problems of the Spanish pension system may lead to more drastic solutions for the new generations, most of whom are well aware that their public pensions will no longer be as generous as they are today.

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