If there is something that worries Spaniards, in addition to housing of course, it is the long-term viability of the pension system. And there are quite a few economists who question the functioning of the Spanish pension system, such as Gonzalo Bernardos, who thinks that retirees are paid too much. All these doubts are based on the fact that Spain has been adding ‘patches’ to its public distribution architecture for more than 15 years to try to resist the demographic challenge derived from the aging of the population, the increase in longevity and the massive retirement of the baby boom generation.
But despite registering contributions at record levels and having introduced new additional tax costs on employment such as the Intergenerational Equity Mechanism (MEI), the structural hole in Social Security accounts remains at alarming levels. Hence, comparisons with the pension systems of other countries keep coming up, especially those that operate with the euro.
Social Security penalizes the pension of those who decide to retire early, but this cut will not affect their spouse’s future widow’s pension.
A woman with breast cancer and 31 years of contributions is denied a retirement pension after the pandemic because she spent more than two years without registering as a job seeker
If we analyze the data published by the main international economic indicators, Spain appears significantly penalized in its long-term financial viability. The renowned global study of Mercer CFA Institute Global Pension Index places the Spanish sustainability subindex at a mere 34.2 out of 100. While the national political conversation focuses all its efforts on penalizing early retirement through reducing coefficients or demanding a greater tax burden on active generations, in northern Europe an alternative is already operating that breaks with all the ideals of retirement pension management. Estonia has shown that it is possible to guarantee the solvency of the system by transferring absolute control of the money to its legitimate owner, who is none other than the worker himself.
The Baltic system allows you to be a ‘broker’ of your own retirement
Unlike the traditional mandatory capitalization models implemented in other European environments, where funds are managed monolithically by macro financial entities or closed sector commissions, the reform implemented by the Estonian Government allows for great flexibility that is not seen in the pension systems of other countries. Through the so-called Pension Investment Account (technically known as PIK account, by its acronym in Estonian), every employed citizen can take direct responsibility for his or her mandatory savings for old age.
The financial mechanism of the Estonian model works under a fairly easy-to-use mixed structure that is managed from the beginning through electronic banking portals. When an employee receives his salary, the system operates with the following modus operandi:
- Direct employee contribution: 2% of the gross salary is automatically deducted from the employee’s payroll and goes directly to their capitalization account.
- Complementary contribution from the State: The public sector compulsorily complements this capital by injecting an additional 4%, money that is deducted from social tax contributions (which in Spain is equivalent to the company’s common contingency).
- Total self-management of assets: Instead of this total 6% being trapped in traditional funds that impose high fees, citizens can use their PIK account to directly buy shares in global stock markets, sovereign bonds, index funds or low-cost exchange-traded funds (ETFs) with just one click from their mobile financial application.
The regulations of the Baltic Republic allow the worker to modify his investment strategy easily and without any cost. Savers can transfer all their accumulated capital from a conventional fund to their self-managed investment account (or the other way around) up to three times a year, forcing banks to truly compete to offer the lowest commissions. Doing something like this in Spain seems unthinkable.
The financial chasm between Spain and Estonia
The fundamental difference in economic philosophies is seen above all in the fact that Spanish Social Security is totally inflexible and rigid, that is, it is a system in which the worker or future retiree cannot enter or practically modify anything. In other words, the digital engineering of the Baltic country makes it possible to modify practically everything regarding contributions and savings for future retirement. Furthermore, to make matters worse, the Spanish system spends the money collected from current contributors instantly to pay the same month’s benefits of current retirees, removing contributors from the possibility of accumulating real and productive assets in their name.
| System Dimension | Spain model | Estonian model |
|---|---|---|
| Financing Architecture | Pure distribution system. Current contributions cover current expenses immediately. | Mixed system. Combination of mandatory public base with individual capitalization accounts. |
| Control of Funds | Absolute state monopoly. The worker lacks the capacity to choose the destination of his contribution. | Total self-management through digital PIK accounts linked to the main global markets. |
| Property Law | Right to expect future collection, conditioned on the budgetary situation at the time. | Real and explicit legal property. The funds constitute real assets in the name of the contributor. |
| Inheritance Regime | Not inheritable in capital. In the event of death, only restricted widow’s pensions are generated. | 100% heritable. The assets accumulated in the investment account pass entirely to the direct heirs. |
| Management Flexibility | Non-existent. The conditions for contribution and counting of years are fixed in a fixed manner by the Ministry. | High flexibility. It allows you to make changes to your strategy or banking entity for free three times a year. |
Three fundamental lessons that transform economic culture
The success of the Baltic scheme is not based solely on diverting funds from public coffers to the stock markets, but on generating a radical change in social behavior and mentality. The analysts of the entity’s official informative portal Estonian Pension Center (Pensionikeskus) confirm that this reform has brought with it three structural advantages that Spain should immediately assimilate:
1. Emancipation in the face of state paternalism: In Spanish society, the idea prevails that the State will fully resolve the economic needs of old age, which discourages personal provision. The Estonian model forces resources to be set aside for the future, but relies completely on the maturity and judgment of the individual to decide the ideal investment method.
2. Massive financial literacy: When an employee observes month after month that the evolution of his future retirement is directly linked to the behavior of index funds or global companies, there is an immediate stimulus to understand the concepts of compound interest, inflation, risk diversification and the functioning of capital markets.
3. Transparency and shielding from political swings: The reforms of the Spanish public system vary depending on the color of the party in Government, which generates enormous legal uncertainty about how much will be charged in the future. In Estonia, since the money is capitalized in private financial assets owned by the citizen, savings are completely shielded from budgetary arbitrariness or changes in law. The worker knows exactly the real-time balance of his assets just by consulting his mobile phone.
The definitive lesson left by this analysis is evident. To sustain the Welfare State for the coming decades without suffocating the competitiveness of companies or depressing the net salaries of young workers, it is essential to abandon provisional solutions and implement profound structural changes that give prominence to freedom and individual responsibility.