The future unviability of the current public, contributory, pay-as-you-go pension system in Spain is one of the urgent issues to be addressed by any government, but political expediency causes it to be postponed time and again.
The expert Diego Valero, president of the consultancy Novaster, explains the causes of the problem to Proa Comunicación, and proposes solutions so that the pension system maintains the current level of benefits for future generations.
Unworkable system
Why is the system not viable? Because of two factors. The first is the greater longevity of people, which lengthens the effective time they receive pensions, and with it the expenditure. The second is the high percentage (80%) that the pension represents of the salary received during working life, which discourages savers from seeking alternatives outside the public system.
The result is that the current system will not be sustainable in the long term, which will force a reduction in the percentage of pension compared to salary, and/or an increase in the minimum retirement age. In other words, the number of years of social security contributions, if the retirement pension is to be received at its current level.
Therefore, the first step that savers need to take is to know what their retirement benefit will be, so that they can set up a savings plan tailored to their needs. This is information that the state should provide to savers, but does not do so.
Efficient pension model
There are other mixed pension models that combine benefits from the public system with contributions from the company and individual savings, which are much more efficient than the current one.
The most effective model should be one in which the public system determines a basic minimum level for subsistence, adding a benefit level based on contributions made, plus the use of behavioural economics to encourage individuals to save, and if this model is applied, the level of future savings will be sustainable because the pension pot will grow.
Communication, a key tool
Communication can serve to raise awareness of new models other than the current one, both for savers and for the public and private entities involved, and to encourage decision-making. In short, communication should be the tool that shows everyone the way forward.
Communication is therefore key, to inform savers about the different benefit options in retirement if they do not change their strategy, and to clarify what level of pension will be achieved depending on the level of savings taken.
Moreover, communication can be very useful in stimulating behavioural economics, i.e. the analysis of economic behaviour in terms of human psychology. If used as a tool for this purpose, it can become an indispensable lever for interpreting, and correcting, behaviour. More importantly, it can help in decision-making.
Raising public awareness of the urgent need to look for alternatives to the current pension system must be done in a simple, straightforward and attractive way, and at the right time. The result will be quick and correct decision-making.
Javier Ferrer
Financial Communication Area Director Proa Comunicación, passionate about the world of investments and a specialist in communicating business models based on financial advice and wealth management.