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The Future of Pensions

The pension system needs urgent reform to remain viable

The future viability of the current pension system in Spain is an issue that increasingly worries experts and the public, as well as private businesses that provide services to citizens to resolve the need for a stress-free retirement with a minimum guaranteed income level. In a recent session 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 discussed, based on the analysis of two contrasting pension systems, the Spanish and the Mexican.

In Spain, the system is contributory and redistributive, which means that the worker pays some amounts to Social Security (the majority by the employer unless the individual is self-employed) during the individual’s working life. When it ends, the accumulated fund is distributed among retirees based on criteria such as years of contributions, amounts, etc. The Mexican system is one of pure capitalization, in which both the state and the employer contribute some amounts to the worker so that the worker him/herself, through different public or private organizations, invests them with the aim of recovering the invested funds at the time of retirement.

Necessary reforms

The presenters agreed that the pension system needs urgent reform so that it can continue to guarantee future generations the current level of benefits, that is, with the same level of income and expenses. This is what experts call intergenerational equity, something that is no longer possible.

It isn’t because the percentage of public spending allocated to cover pensions will go from the current 12% to 16% or even 18% in the medium term. This means that to maintain this equity in contributions and benefits, you have to choose between several solutions. Alternatively, increase the amount of Social Security contributions, raise taxes, or allow the level of benefits to decrease compared to the current one, or in a final scenario, having the State to go into debt so that the stock market for retirement benefits does not lose in the future.

Several factors have contributed to this situation. Demographic aging is one, because it leads to greater longevity and therefore increases the time period during which retirees will receive their monetary benefits in the form of pensions. Low interest rates is another, because they encourage greater public debt to cover future spending which future generations will have to bear. Lower economic growth has resulted in less income for businesses and the state. And finally, a lower birth rate, which reduces the amount of workers who must support their contributions for retirement benefits.

According to several speakers of the session, within five years the number of workers who reach retirement age and will be incorporated into the benefits system will jump from the current 300,000 to 600,000. This will be a difficult situation to manage if we want to achieve the objective of any public or private pension system: to ensure a comfortable retirement, with a standard of living similar to that of working life.

 Solutions

Among the various solutions proposed in trying to achieve financial sustainability of the pension system in Spain, experts mention encouraging saving (known as behavioral economics), financial innovation to generate financial products and services that can complement the needs that won’t be covered by pensions in the future and the greatest transparency and the highest level of information for citizens on this matter.

A solution that entails the need to further financially educate society, so that they understand the problem in its real dimensions and are encouraged to look for other alternatives that can provide them with that complementary income that won’t be earned in the future.

An imaginative proposal was that of the new digital Mexican platform www.millasparaelretiro.com. It is a formula that incentivizes saving through domestic consumption through a simple app and a credit card linked to the purchases that consumers make in their daily lives. These purchases generate savings automatically for retirement, without closing the door to other types of contributions motivated by that consumption and voluntary savings.

Political consensus is another key issue to materialize this reform of the pension system, because ideological differences between political parties, more evident in electoral periods like the current one, delay decision making. A situation that, if not solved in time, will have to be addressed inevitably once public debt levels skyrocket and when institutions such as the European Union impose measures to address the problem.


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

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