The latest news about pensions in Spain speaks of a possible peak in spending on this benefit by Social Securitytaking into account the upcoming retirement of the so-called ‘baby boomers’. The pension fund, in this way, would be affected and the experts already question the sustainability of the current public system. Fedea (Foundation for Applied Economic Studies) proposes a profound change and has published a report signed by José Enrique Devesa, Rafael Doménech and Robert Meneu.
In this document (which can be consulted in full by clicking on this link) proposes to progressively replace the pay-as-you-go model with a system of notional accounts over a period of no less than 20 years. According to their calculations, this would allow pension spending to be reduced by between 10% and 40% in the long term, depending on economic growth and reinforcing the sustainability of the system.
You may be interested
A woman begins to collect her widow’s pension and Social Security forces her to return 10,542.12 euros after recognizing the right of the deceased’s first wife
Social Security will add up to 5 years of contributions to workers who had to interrupt their career to care for children, but the benefit is only for one of the parents
Now, what does this notional accounts model consist of and how would it benefit the system? It is already applied in countries like Italy and Sweden and works as follows. Each worker accumulates in a virtual account the value of their contributions, updated with an interest rate that is always linked to the GDP (Gross Domestic Product) and the resulting balance is transformed into an initial pension with updates that take into account aspects such as age or life expectancy.
This would ensure that Social Security pensions were always and automatically adjusted to the demographic and economic conditions of the country.
The new pension system would apply to those born after 1971
Fedea proposes that this new system be applied progressively starting with those who were born in 1971, so that their retirement pension can be increased by 5% annually. Those born in 1990 could get 100% of their pension following the notional accounts model.
In a scenario in which GDP growth is 2.24%, the savings would be 0.6% of GDP in 2025 and 10.7% in the long term. In the least favorable context, with an advance of 1.23% of GDP, savings would drop to 1.7% in 2025 and reach 40% in the long term.
Experts point out that this well-designed system could end the inequalities of the current pension system, since it takes into account the contributory effort made during working life, taking into account that the current system favors short, irregular work careers or higher regulatory bases.
With this new system, lower regulatory bases, longer careers and those requesting early retirement would be favored. As a consequence of this, and indirectly, the self-employed and men would also benefit.
“This is because the notional accounts system guarantees by design balance and actuarial equity, so that all individuals obtain expected pensions proportional to their contributory effort throughout their working life.”
The average pension with this system would be 12% lower
The average pension with this system of notional accounts would be 12% less than the current one, which according to data from the Ministry of Inclusion, Social Security and Migration, is at 1,506 euros per monthaccording to a simulation carried out with the data published in the 2023 Continuous Sample of Working Lives.
Fedea warns that this difference would justify a prolonged transition of at least 20 years to avoid sudden drops between benefits and correct inequalities between people. It recommends that it be accompanied by a ‘robust’ Reserve Fund with adjustment mechanisms and policies to support the complementary pillars of social security.
Replacement rates would be close to the European average
The conclusions of the study highlight that this new pension system would place replacement rates, which is the relationship between pension and salary, at levels closer to those of the European Union (EU), between 50% and 60% compared to the current 74%. In order to guarantee this sufficiency, it defends maintaining the supplements to minimum pensions financed through taxes.
Fedea insists that the success of a reform of this magnitude would require a social and political consensus, a coherent fiscal and macroeconomic framework that allows preserving citizens’ confidence in the public system.