An efficient, sustainable pensions system must respect a series of fundamental principles: the contributory principle (proportionality between contributions and receipts), fairness, intergenerational solidarity, adequacy and economic balance. In the case of Spain, these principles were defined within a context of broad consensus between political parties in what would become known as the Toledo Pact.
Although the Spanish system has worked properly in the past, the foundations have been undermined and its sustainability threatened as a result of demographic and social trends, in particular the ageing of the population and fall in the birth rate, along with certain recent political decisions. The trend in the dependency ratio and progressive increase in the benefit ratio further explain the 90% increase in pensions spending. Social Security spending has exceeded revenue since 2010 and the gap has grown progressively, to the extent that the Reserve Fund has been exhausted leading to a debt amounting to €91.855 billion in the third quarter of 2021. This represents some 7.9% of GDP.
Following significant reforms approved in 2013, namely delaying the retirement age, increasing the qualifying period, introducing the sustainability factor and a new adjustment mechanism, the most recent reforms have, during the first phase, consisted of transferring part of the system’s expenditure to the National Budget, restoring pension increases in line with the Consumer Price Index and removing the sustainability factor. In the second phase, a proposal has been made for an alternative intergenerational fairness mechanism agreed with the trade unions and in the absence of support from employers. The foregoing does not improve the sustainability or fairness of the pensions system. These partial measures, some of which reverse the preceding policies, once again threaten the sustainability of the system, often more so.
There is therefore a crucial and compelling need to transform the system with long-term vision to ensure its sustainability, balance, efficiency and respect for solidarity between generations.
The establishment of a system of notional individual accounts could be a way forward in solving the problem. We are talking about a defined contribution and distribution system that establishes actuarial balance between contributions and pensions, as already successfully implemented in nearby countries. Alongside the postponement of the retirement age, this model would ensure the sustainability of the system following a necessary transition period. It would also offer citizens a forecast of their future pension, increasing transparency and trust in the system. It would give them greater freedom to decide on the length of their working life and incentivise postponing their retirement.
In order to achieve actuarial balance and maintain the current level of the Spanish state pension, providing citizens with a pension equivalent to 2.5 times the contributions made, the age of retirement should be raised to 70. Citizens would be offered a retirement span of between 68 and 72, with a lower pension in the case of retirement before 70 and higher benefits for postponing this beyond 70. This would enable citizens to properly plan the moment at which to retire and the amount of their pension.
In tandem, it would also be necessary to encourage supplementary retirement funding through private savings such as company and private savings plans, reverse mortgages and the sale of property titles, whilst also providing tax incentives and other support measures. The establishment of an “Austrian backpack” model, proposed by Círculo of Empresarios as a key component of labour reforms, would likewise contribute to increasing the amount of retirement savings while improving the availability of the financial resources necessary for economic growth and business investment.
As an essential component of the welfare state, any major reform affecting the Social Security system to ensure its medium and long-term sustainability must come about through the greatest degree of Parliamentary consensus possible, preferably by means of an agreement between social and economic stakeholders and with long-term outlook placing the common interest above electoral and short-term interests. There is a profound lack of solidarity in continuing to put off reforms, loading the burden of essential changes onto future generations.
A system of notional accounts as proposed here could tackle a challenge of this magnitude and solve the problem of the sustainability of a balanced pension system, provided that it is established gradually and adequately funded. It would, however, need to be complemented by the measures proposed here, along with structural reforms that contribute to an increase in the potential growth of our economy and a reduction in unemployment to a level close to that of our European partners.
