Once upon a time, back in 2013, the Spanish government announced a mass communication addressed to workers over 50, informing them about a rough estimate of the future retirement pension they would be entitled to after a few years. Why has this promise never come to fruition? Today we explain it to you.
The creation of the Welfare State
The contributory retirement pension, which corresponds to us for our contributions made during our working life, has not always existed. The creation of Social Security, as we know it today, dates back to the 1960s.
Until that time, Spaniards either never retired or saved for retirement. With the advent of the Welfare State, after difficult negotiations due to the complexity of regulating the entire public benefits system, it was possible to give shape to what we know today as public benefits and Social Security.
How does the pension system work?
It is a “pay-as-you-go system”, not a capitalization system. This means that we, as contributors, are paying into the Social Security, putting money into the “piggy bank”, without really knowing what we will recover when we retire. On the other hand, a capitalization system would be one in which, by contributing money, we would recover the same plus interest at the end of our working life.
Depending on the level of contribution, we will receive more or less money when we retire. The problem lies in the total uncertainty about the amount of pension we will receive, due to the constant legislative changes and the worrying situation of the Social Security itself. For these reasons, many people have decided to start saving for that moment.
The problems of today’s pensions
We are going to explain what is going wrong and what is not being clearly explained to citizens. These are the reasons why the informative “little piece of paper” of our future pension has never been sent:
- The demographic situation in Spain: there is a progressive aging of the population in our country. This GIF is good proof of this: in it we can see how the “population pyramid” is getting fatter at the top, and the average age goes from the current 43 years to 50, in the year 2050. At the same time, echoing the program recently broadcast on TV “Cintora en la calle”, and based on data from the National Institute of Statistics, we know that:
– Today: there is 1 person over 65 for 4 people of working age.
– In 2050: when many of us retire, this ratio will drop enormously, to 1 person over 65 for only 2 people of working age. - The economic situation: the purely population data must be filtered, and out of those people of working age, how many actually work?
– Today: of those 4 people only 2.3 work and, in addition, they do so with very low salaries. This means that their contributions (what goes to Social Security income) are not high either.
– In 2050: for each retired person, only 1.4 will be working. And it is estimated that the number of retired people will increase by 8 million over the current number, and that the number of people of working age will decrease by 8 million. - The famous “Pension Piggy Bank”, the Reserve Fund, has already consumed half of its balance. All the newspapers have published the cut from 66,815 million euros in 2011 to the current 32,481 million in 2016 (in 2015 more than 13,000 million were drawn down).
Unfortunately, all these data are true, and many of you are already aware of this. Not in vain, there is a palpable public concern, and surveys echo this, indicating that 73% of Spaniards are very worried about their retirement, and almost 80% about the future of the Social Security.
Reforms carried out by the Government
In tune with these problems, several reforms have already been initiated to try to sustain the pension system and correct the budgetary imbalance of the Social Security, such as:
- Progressive delay of the normal retirement age: from 65 to 67 years of age.
- The calculation of our pension does not include the last 15 years of contributions, but will be increased to the last 25 years, with the sole purpose of reducing the average pension to be paid. Concretely between 7 and 9%, according to the Institute of Spanish Actuaries.
- Limit the annual revaluation rate to 0.25%. Previously, it was linked to the CPI, i.e., to the increase in the price of goods. This means a very high loss of purchasing power. If the CPI stood at 2%, this means that in just one year, we would lose 1.75% of our purchasing power. If this accumulates year by year, in just over 10 years we will have lost at least 20%.
- Introduction of the “sustainability factor”. This that sounds so strange, they justify it in the increase of life expectancy: if before you lived 15 years after retirement and were X thousands of euros of total pension, now that you live 20 or 25 years you want to pay the same total, between more years, which means that the monthly pension has to go down. This factor is introduced in 2019.
The harsh reality of change
As you can see, there are several changes, but they are very progressive, so that from one year to the next they do not attract attention. But under this “painless” appearance, the accumulated calculation shows the real results of the reforms and, above all, the enormous reductions in future pensions.
The clearest way to check this is the so-called “replacement rate”: it is the percentage that our retirement pension represents in comparison with the last salary received. Until now, we Spaniards were very well accustomed (or badly accustomed, depending on how you look at it), and we had 85%. That is to say, if our last salary was 2,000 euros, for example, 85% of that amount is what we received in pension: 1,700 euros a month, for 14 payments. In the future, with all the reforms mentioned, we will reach the European average, which is 55% (from €2,000 to €1,100). Now we understand the savings culture that exists among our European neighbors.
Based on all this, we can now understand why Madrid is delaying the sending of information about our future pensions. From here, we trust that the general situation can improve, so that Spaniards will have sufficient income to have the capacity to save and be able to provide ourselves with an economically placid retirement.
If you are lucky enough to have a margin to save and want us to advise you on how to do it so you don’t face a disappointing pension, contact us. Our Savings and Investment Department will help you to increase it.
