The future infeasibility of the current public, contributory and pay-as-you-go pension system in Spain is one of the most urgent issues to be addressed by any government, but political expediency has meant that resolving it has been postponed time and again.
The expert Diego Valero, President of the consulting firm Novaster, explains for Proa Comunicación the root causes of the problem and proposes solutions so that the pension system may maintain the current level of benefits for future generations.
An Unfeasible System
Why is the system not viable? Two key factors. Firstly, greater life expectancy, which extends the effective time pensions would be received, and with it increasing the expense. Secondly, the high percentage (80%) the pension represents of the wages formerly received as a worker, discouraging the saver to seek alternatives outside the public system.
The result is the unsustainability of the current system in the long term, which will force a reduction of the pension as a percentage of wages and/or an increase the minimum retirement age. That is, the number of years of contribution to Social Security, if you want to receive the retirement pension at its current level.
Therefore, the first step the saver needs to take is to know what will be the benefit they'll receive at the time of retirement, to be able to establish a suitable savings plan. This is information that the state should provide to savers, but that it currently doesn't.
Efficient Pension Model
There are other models of mixed pensions that combine the provision 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 minimum basic sufficient level, adding a level of benefit based on the contributions made, plus the use of behavioural economics to encourage saving among individuals. With this model applied, the future level of savings will be sustainable because the stock market for pensions will grow.
Communication: A Key Aspect
Communication can serve to publicize new models different from current one being implemented, both for the saver as well as for public and private entities involved, as well as to move along the decision making process. Communication, in short, must be the tool that shows everyone the way forward.
Communication is therefore key to inform savers about the different options of provision in their retirement stage if their strategy does not change, and to clarify what level of pension will be reached depending on the level of savings assumed.
In addition, communication can be very useful to stimulate behavioural economics, that is, the analysis of economic behaviors based on human psychology. If it is used as a tool to this end, it can give indispensable leverage in interpreting and correcting behaviors. More importantly, however, it can help in decision making.
Making society aware of the imperative need to find alternatives to the current pension system must be done in a simple, calm, and appealing way, also at the right time. The result will be quick and appropriate decision making.
Javier Ferrer
Director of Financial Communication at Proa Comunicación, enthusiast of the investment realm and expert in communicating business models supported by financial advising and asset management.