Numerous experts had already anticipated that all the corrective factors introduced in our public pensions would reduce the purchasing power of retirees. Let’s see what they say, concretely.
Recent pension reforms
As we have discussed in numerous previous articles, the sustainability of pensions is in question. The permanent deficit of Social Security is aggravating a situation that is causing the “Pension Piggy Bank” to run out.
Faced with this prospect, the government has been introducing new corrective measures for pensions, which basically reduce the amounts to be received by new pensioners:
- Increase the number of years that influence the calculation of the pension to be received: it will progressively increase from 15 years to the last 25 years of contributions.
- Control the index that revaluates pensions annually, leaving 0.25% (previously linked to the CPI).
- The retirement age is delayed from 65 to 67 years of age.
- Establishment of a sustainability factor: this factor, due to the greater longevity of retirees, controls and lowers the pension, in order to be able to pay it for more years, basically.
Expert opinions
Recently, the president of Inverco, Ángel Martínez-Aldama, spoke about the consensus of economists that over the next four decades, the revaluation of pensions will remain at 0.25%. The worst of its consequences is this: the loss of purchasing power.
The consequences of such a significant reduction in the purchasing power of retirees are very serious. Especially because the cumulative effect of this drop in purchasing power over 40 years is enormous.
If so many experts are on the same line, we must assess its consequences, and act to correct the effects of all this on our domestic economy.
Promoting financial literacy and other proposals
Angel points out the importance of reinforcing information to workers, from the government, so that they can act accordingly (knowing what pension they will be left with).
Why? Because of what he himself said: “The diagnosis is clear. We are going to go from 8 million to 15 million pensioners. The challenge will become more acute in 2022 and 2023 with the retirement of the ‘baby-boom’ generation.”
He proposes to transfer 4% of workers’ contributions to a system of individual capitalization to cushion the reduction of pensions.
It is no trivial matter that the replacement rate (which compares the last salary with the first monthly pension payment) will be reduced from the current 80% (one of the highest in the OECD) to around 50% in only thirty years.
This greater financial culture of which the experts speak, would translate into informed decision making. As an Insurance Brokerage in continuous training and with a specific Department of Savings and Investment, we must advise to complement public pensions. If you want to be well informed, contact us.
