Throughout the last few weeks pensions have been a theme widely and fiercely debated in the mass media, based mainly on one big and tremendous lie… that pensionists have lost purchasing power. This lie has been widely spread by the news and economic journals all along the country and have caused retired citizens to go on riot at the main Spanish cities. These pensionists’ movements have been fully backed by far-left parties as Izquierda Unida or Podemos, which claim that the solution for this problem (which is really about a recessive demography and lack of labour productivity) is that not enough taxes are imposed yet on “the rich” or financial entities. The real problem here is very easy to identify, and comes directly from the route of the issue, as an exclusively public pension system will never provide enough capital resources to cover pension payments with a declining demography, as funds are directly transferred to recipients and don’t pass through a revalorization process, leaving financial loopholes uncovered.
As previously exposed, pensionists haven’t suffered at all through the crisis period of 2008-2017, mainly because the government employed fully the Reserve Fund of the Social Security to maintain pension levels stable while contributions were severely declining due to serious wages’ devaluations and an extremely high unemployment, which peaked at a rate higher than 25% throughout the financial recession. The mean pension has increased exponentially along these 9 years, from 950 monthly euros up to 1,200 euros, which represents a revaluation of 30% in nominal terms, and 18% if we discount the mean of the CPI inflation for all these years. These data reflect that pensionists haven’t lost any purchasing power, as quantitatively, in the period 2008-2017, pensions increased nearly 10%, while inflation maintained itself in 10,03%, which implies that the maximum it could be claimed is that pensionists have lost 0,03% of purchasing power, which has been fully covered by extra payments in Christmas or summer, through the usage of the Reserve Fund of the Social Security.
It could also be argued that the lost in purchasing power has affected mainly lower class pensionists; which are those earning the minimum pension, but this results finally in being another fallacy, as the rate of citizens over 65 years in risk of poverty has decreased from 26% down to 15% since 2008. This significant argument could be backed by the fact that Spanish pensions are comparatively much better off than the majority of European pensions, as even though they tend to be lower, the substitution or replacement rate of Spanish pensions tends to be exponentially greater. The replacement rate is what percentage of your last annual wage (LW) are you earning now through your pension (P). Replacement rates are calculated: (P/LW) x 100.
The replacement rate in Spain is actually of 81%, and hasn’t varied for the last 5 years, so Spanish pensionists based on their mean wages are relatively earning the highest pensions in Europe, where replacement rates tend to be placed between 30% and 50%. In European countries pensionists tend to earn higher pensions in absolute terms, and also due to greater private savings and revaluation of those pension funds through capitalization systems or alternative investments to public pensions. As mean wages in other European countries as the UK or the Nordic states tend to be higher, private investment is promoted from the government, as the State is not able to cover fully all necessities deriving from pensionists, which is why countries such as Finland have a mean replacement rate of 41%, and even nations as powerful as Germany have a substitution rate of 38%!
According to INE, in the next 15 years, Spain will lose more than half a million citizens, which is more than 1% of the total population. Searching in the long run, this regressive demography would have caused Spain to lose 5.4 million people in a term of 50 years. This data reflects the severe problems the Social Security is having to confront the involution of the public pensions system. Actually, there are 2.3 workers per retiree, which has decreased from 2007 by 0.3 workers. Actual data reflects that if the trend continues and no changes are made in terms of financing the Social Security or remodelling the pensions system, in 2030, there will be just 1.3 workers per pensionist, decreasing down to just 1 worker per jubilee in 20250, which will make our replacement rate to contract down to 30%-40%. Taking into account that Spanish wages tend to be between a 20% and 30% lower than in leading European countries, this poor replacement rate will generate poverty and scarcity of resources between the pensionists, dropping their purchasing power down to minimums.
In a distributive pensions system, the Government imposes taxes on workers to pay partly for the pensions of national jubilees. Due to this issue, increments in benefits for pensionists are linked directly to increases in the labour force employed nationally or an expansion in productivity, leading to higher wages and incomes. We have seen how a distributive system doesn’t provide guarantees for a future sustainability of the public pensions system, and the best idea which could be presented to confront the enormous problem which our regressive demography generates, will be shifting towards a capitalization system, having also mixed schemes available, similar to Sweden’s or Denmark’s model, or directly full capitalization, just as Chile since Pinochet’s dictatorship.
In a capitalization system “intergenerational solidarity”, which is basically based on contributions from workers to pensionists, they are replaced by saving and investment financial instruments, as investment funds or private equity, which throughout monthly our annual contributions generate profitability over the base capital and cause those pensions to be revalorized in the future, increasing the total value of your savings. Just as it can be observed in Holland, in a capitalization system, benefits obtained by workers after their retirement are completely linked to their own wages during their working life, plus the evolution of those funds based on the development of investment assets, which are directly linked to the functioning of markets, making essential a good diversification, which will provide low volatility.
The essential fact here is that capitalization systems also provide an incentive for greater private saving, as contributions and taxes tend to be much lower that in distributive systems. In Chile’s case for example, just 10% of taxes on income are directed towards AFP funds (pension funds), while in Spain, 28% of revenues generated from taxes on income are employed for the further financing of pensions.
The most sensible and accurate thing that could occur will be reforms to be produced in a near future concerning the pensions system. These reforms should look for a secure and longstanding sustainability of pensions against the uncertainty and volatility that the distributive system generates. In a capitalization system, saving and investment in the private sphere will be incentivized along with productivity, as your wages and the management of them during your working life will determine your future earnings. With the introduction of a capitalization system, respect from the State towards the right to private property will exponentially increase, as taxes will be widely reduced, establishing more attractive and accessible business conditions and requirements, generating along with it employment and economic growth.