The uncertain future for pensions

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When in 1889 the German Chancellor Otto Von Bismarck created the first public pension system, he set the age of retirement at 70. Almost two decades following his death and shortly before the outbreak of the First World War, Germany reduced this to 65. When the most developed countries approached the matter of the various social protection systems at the beginning of the 20th century, retirement at 65 was established as an unmovable benchmark despite the fact that, in the Europe of the 1930s, average life expectancy among men amounted to 52.

Things have changed considerably since then. In Spain, for example, progressive increases in life expectancy mean that the country has one of the world’s highest proportions of elderly people. Our current life expectancy stands at around 83.4 years, five more than the figure two decades ago and behind only Japan (84.4) and Switzerland (83.7).

Meanwhile, the fertility rate, i.e. the number of offspring per female, currently stands at 1.3. This is in comparison with the average of 1.7 for the OECD countries and far below the generational replacement level of 2.1. Although it is necessary to see immigration as an opportunity that can help to rejuvenate our society, we must not seek to stake everything on a single card.

Winston Churchill was in the habit of saying that he only believed in statistics that he had manipulated himself. In the case of the future of our welfare state, there is no need to fiddle the figures in order for them to strike fear into our hearts.

Within little more than ten years, in 2030, Spain will be the fourth-placed country worldwide in terms of highest average age, 50.1 years compared with 33.1 at a global level. By that time, some 25 per cent of the Spanish population will exceed 65 years of age, in comparison with the current 18.7 per cent. What is more, the working age population will have fallen by 6 per cent.

Unless some unexpected demographic revolution occurs within this time frame, between 700,000 and 800,000 people will retire each year whereas, in line with the current figure for annual births, only around 400,000 will enter the labor market. This situation will seriously jeopardize economic growth, the viability of the pension system and the sustainability of the welfare state itself.

The Círculo de Empresarios has been concerned about this issue for over twenty years. In order to provide solutions to a problem of this size, it is essential to take steps far in advance. Given that political parties are incapable of seeing beyond the next municipal, regional, European or general election, we fear that none of them will ever dare to propose stable solutions for the future.

We believe that the reforms agreed since the Toledo Pact, in which the majority political groupings periodically introduce adjustments to the system, represent part of the solution rather than the definitive answer. We are in agreement over parameter-based reforms (postponement of the age of retirement, increase in the number of years of contributions in order to determine the pension amount, etc.), however these patches are clearly insufficient in the face of what is coming.

A recent report by the Foundation for the Study of Applied Economics (FEDEA) asserted that Spanish pensions are among the most generous in the world and that pensioners generally receive more than they contribute. The pension replacement rate, a variable linking the average pension to average salaries net of contributions, stands at 57.7 per cent for Spain. This is far above the average of 44.1 per cent for the European Union, as well as being 7.2 points above the figure for France and 16 points above that for Germany. The gap is even wider if we look at the gross replacement rate, linking starting pensions to final salaries. Within this ranking, Spain leads the European Union with a rate of 78.7 per cent. This is 28.8 points above the average, 33.3 points above the figure for France and more than 40 points above that of Germany.

The application of certain aspects of the 2013 reforms contributed towards balancing out these differences. However, the introduction of the sustainability factor, taking into account life expectancy in order to set the pension amount and which was then established for introduction in 2019, has now been postponed until 2023 at the earliest. A counter reform consisting of the recovery of the CPI for the index linking of pensions has also come about. At the time, the Círculo declared itself in favor of the use of this index for baseline minimums, though not for the remainder. The latter should refer to variables such as productivity, economic growth and the financial health of the system.

Discouraging early retirement and boosting the voluntary extension of working life beyond 67 years of age now appears mandatory. With life expectancies exceeding 83, it makes sense not only to postpone the age of retirement, for example to 70 years of age, but also it will be necessary to facilitate working in tandem with the receipt of pensions. Current formulas do not represent appealing incentives.

Nevertheless, the major reform, of which few dare to speak, consists of the structural reform of the system itself. In order to guarantee decent pensions over the long term, it is necessary to progressively transform the current allocation system into a mixed system consisting of three pillars: allocation, mandatory funding and voluntary funding. The latter would correspond to current private pension plans, though more fiscally attractive than at present.

The demographic indicators are striking. Every pension is today supported by the contributions of two workers, a proportion that, towards 2050, will approach one contributor per pensioner. That is why we are unable to understand why current pensioners are demonstrating for an isolated increase, rather than young people whose future pensions are seriously in jeopardy.

Original article by John de Zulueta, Chairman of the Círculo de Empresarios, published in the Spanish newspaper ABC

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