Pablo Fernández, professor in the Department of Financial Management at IESE Business School, has written an interesting article on the current and future situation of the pension system in Spain. In this article, he analyses, using statistical data, the prospects of the current public pay-as-you-go system in our country, and explains the growing need to reform the current system in view of its unviability in the future.
This situation also generates a growing need among current contributors to subscribe to private alternatives such as Pension Plans, which in the future will complement a level of retirement income that will be progressively reduced by the public system.
The data on which this thesis is based are set out in a series of statistical tables compiled by Professor Fernández, which are presented below.
1.-EVOLUTION OF THE SPANISH POPULATION PYRAMID
The following two figures show the population pyramid of Spain in 1970 and the "tip of the spear" in 2015. The difference between the two figures is due, at the top, to the increase (on average) in the number of years Spaniards living and, at the bottom, to the decrease in births (partly due to the killing of children before birth) since 1980.
There is a small effect of immigration in more recent years. How many contributors per pensioner will there be in 2040, in 2050,...? One thing is certain: far fewer than in 1970 and, unless the birth rate in Spain rises sharply in the coming years, fewer than today. According to the INE, in 2014 there were 9.2 million pensions, 4.6 million unemployed and 16.5 million contributors (less than 2 contributors for each pension).
2.- EVOLUTION OF THE POPULATION IN SPAIN
The following graphs show the evolution of the population in Spain comparing deaths versus births, population evolution, and population evolution by age range. As can be seen, the Spanish population is tending to age.
3.-PUBLIC DEBT IN SPAIN
The following two figures show the evolution of the volume of Spanish public debt and the yield on 10-year and 1-year treasury bonds. The author asks "Who buys and holds all this huge amount of Spanish debt, with a ridiculous IRR? The dwindling Social Security Reserve Fund is (in 2014 and 2015) invested at 100%". So "it seems obvious (today and for quite a few years now) that the sensible thing to do when it comes to retirement is to try to save something and invest it well to supplement the meagre pension that the State will probably give us when we retire".
4.- THE SOCIAL SECURITY RESERVE FUND
The author states that "The Reserve Fund accumulated €32,481 million at the end of 2015 and its market value is €35,035 million The Social Security had €13,250 million available in 2015 from the Reserve Fund to resolve liquidity shortfalls at specific times and in order to guarantee the ordinary and extraordinary payment of pensions.
On the other hand, the following graph shows that Social Security has been in deficit since 2011 and continues this trend, despite the increase in GDP and Employment levels since 2014.
5.- EVOLUTION OF THE AMOUNT OF MAXIMUM AND MINIMUM PENSIONS
The following table analyses the future evolution of maximum and minimum pensions after the reform implemented in 2015, which introduced new sustainability and revaluation criteria based on life expectancy. As can be seen in the graph, the difference between maximum and minimum pensions falls from around 1,730 euros in 2015 to an estimated 1,150 euros in 2065.
5.- EVOLUTION OF THE NUMBER OF MEMBERS AND PENSIONERS
The following tables show the 2007-2016 evolution of Social Security enrolment and pensioners which, as can be seen in the first graph, is negative in terms of enrolment and positive in terms of the number of pensioners. The second graph shows that, since 2011, the volume of Social Security contributions has been lower than that of contributory pensions, a trend that has become more pronounced over the years.
The conclusion from these figures is clear: "the current pension system is destroying value, and its financial self-sufficiency is severely compromised, as is its resilience to adverse economic cycles". Reform is therefore urgently needed to ensure that pension levels are maintained.
And there is also an urgent need for a new approach by the asset management industry to investment vehicles (pension funds) that provide a comfortable retirement for investors. Both in terms of cost, diversification, range enhancement, open architecture, and tax incentives.
They have contributed to the article:
Pablo Fernández. Professor of Finance at IESE. e-mail: fernandezpa@iese.edu
Eduardo de Apellániz. Research Assistant
Juan Fdez Acín. Independent researcher