Pension system needs urgent reform to remain viable
The future viability of the current pension system in Spain is an issue of growing concern to experts and to public and private entities that provide services to citizens to resolve the need for a peaceful retirement with a guaranteed minimum level of income. At a recent conference held at the Casa de México in Madrid, under the title "The future of Spain-Mexico pensions", the future prospects of the current pension model were debated, based on an analysis of two contrasting systems, Spain and Mexico.
In Spain, the system is contributory and pay-as-you-go, which means that workers pay into the social security system (mostly by the company that employs them, unless they are self-employed) during their working life. At the end of their working life, the accumulated fund is distributed among the retirees according to criteria such as years of contribution, amounts, etc. The Mexican system is a pure capitalisation system, in which both the state and the company contribute amounts to the worker so that it is the worker himself who, through different public or private bodies, invests them with a view to redeeming them at the time of retirement.
Essential reforms
The speakers agreed that the pension system is in urgent need of reform so that it can continue to guarantee future generations the current level of benefits, i.e. with the same level of income and expenditure. This is what experts call intra-generational equityThis is no longer possible.
And it is not because the share of public expenditure devoted to pensions will rise from 121TDP3T today to 161TDP3T or even 181TDP3T in the medium term. This means that, in order to maintain this equity in contributions and benefits, there will be a choice between several solutions. Either the amount of social security contributions will increase; or taxes will rise; or the level of benefits will fall compared with the current level; or, in the last resort, the State will have to borrow to ensure that the pot of money earmarked for retirement benefits does not shrink in the future.
This situation is caused by several factors. Demographic ageing, because it leads to greater longevity and, therefore, to an increase in the time during which pensioners will receive their pension benefits. Low interest rates, because they lead to higher public borrowing to cover future spending, which future generations will have to bear. Lower economic growth, which means less revenue for companies and the state. And, finally, the lower birth rate, which reduces the mass of workers who will have to pay pension benefits through their contributions.
According to several of the speakers at the conference, within five years, the number of workers reaching retirement age and joining the benefit system will rise from the current 300,000 to 600,000. This is a difficult situation to manage if we are to achieve the objective of any public or private pension system: to guarantee a comfortable retirement, with a standard of living similar to that of working life.
Solutions
Among the various solutions mentioned to achieve the financial sustainability of the pension system in Spain, the experts mentioned the promotion of savings (what is known as the "la behavioural economics), financial innovation to generate financial products and services that can complement the needs that will not be covered by pensions in the future, and greater transparency and information for citizens on this issue.
A solution that entails the need to increase financial education in society, so that they perceive the problem in its real dimension and are encouraged to look for other alternatives that can provide them with that additional income that will not be received in the future.
An imaginative proposal was made by the Mexican digital platform start-up www.millasparaelretiro.com. It is a formula that encourages savings through domestic consumption via a simple app and a credit card linked to the purchases that consumers make in their daily lives. These purchases automatically generate savings earmarked for retirement, without closing the door to other types of contributions motivated by this consumption and voluntary savings.
Political consensus is another key issue to materialise this reform of the pension system, because ideological differences between parties, which are more evident in election periods such as the current one, delay decision-making. A situation that, if not resolved in time, will have to be addressed in an obligatory manner, once public debt levels soar and bodies such as the European Union impose measures to correct the problem.
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.