Once upon a time, back in 2013, the Government Spanish announced a mass communication addressed to workers over 50 years old, The Commission shall inform them about a rough estimate of the future retirement pension Why has this promise never been fulfilled? Today we explain.
The creation of the welfare state
The contributory retirement pension, The pension system, which we are entitled to on the basis of our contributions during our working life, has not always existed. The creation of the Social Security, as we know it today dates back to the 1960s.
Until then, Spaniards either never retired or saved for retirement. With the arrival of the Welfare State, After difficult negotiations due to the complexity of regulating the entire public benefit system, what we know today as public benefits and social security was shaped.
How does the pension system work?
It is a «pay-as-you-go system».», not capitalisation. This means that we, as contributors, are paying into the social security system, putting money into the “piggy bank”, without really knowing what we will get back when we retire. A funded system, on the other hand, would be one in which, by contributing money, we would get it back plus interest at the end of our working lives.
Depending on the level of contributions, 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, The social security system itself is in constant legislative changes and the worrying situation of the social security system itself. For these reasons, many people have decided to start saving for that time.
Today's pension problems
Let us explain what is going wrong and what is not being clearly explained to citizens. These are the reasons why the information “paper” on our future pension has never been sent out:
- The demographic situation in Spain: there is a progressive ageing 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, with the average age rising from the current 43 to 50 in the year 2050. At the same time, echoing the recently aired TV programme “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 every 4 people of working age.
- In 2050: when many of us retire, that ratio drops sharply, to 1 person over 65 per 2 of working age only. - The economic situation: The purely population-based data must be filtered, and of those people of working age, how many are actually working?
- Today: of these 4 people, only 2.3 work and, moreover, they work for very low wages. This means that their contributions (what goes to social security income) are not high either.
- In 2050: for every 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 fall by 8 million. - The famous “Pension Piggy Bank”, the Reserve Fund, has already used up half of its balance. All newspapers have published the cut from 66.815 billion euros in 2011 to the current 32.481 billion euros in 2016 (in 2015 more than 13 billion euros were used).
Unfortunately, all these facts are true, and many of you are already aware of this. Not surprisingly, there is a palpable public concern, and the surveys echo this, indicating that the 73% of Spaniards are very worried about their retirement, and almost 80% are worried about the future of the S.S.
Reforms carried out by the government
In tune with these problems, a number of reforms have already been initiated to try to sustaining the pension system and correct the budgetary imbalance of the Social Security system, such as:
- Progressive delay of the ordinary retirement age: from 65 to 67 years of age
- Compute The calculation of our pension will not be based on the last 15 years of contributions, but will be increased by the number of years we have contributed. the last 25 years, with the sole purpose of reducing the average pension payable. Specifically 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 things. This means a very high loss of purchasing power. If the CPI were to stand at 2%, this means that in one year alone, we would lose 1.75% of 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 sounds so strange, but they justify it by the increase in life expectancy: if you used to live 15 years after retirement and paid X thousands of euros in total pension, now that you live 20 or 25 years you want to pay the same total, with more years, which means that the monthly pension has to go down. This factor will be 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 beneath this “painless” appearance, the cumulative calculation reveals the real results of the reforms and, above all, the huge reductions in future pensions.
The clearest way to see this is in the aptly named “substitution rate”.”The percentage that our retirement pension represents in comparison with the last salary received. Until now, Spaniards have been very well accustomed to this (or badly accustomed, depending on how you look at it), and we had an 85%. That is to say, if our last salary was €2,000, for example, 85% of that amount is what we received in pension: €1,700 a month, for 14 payments. In the future, with all the reforms mentioned above, we will reach the European average, which stands at 55% (from €2,000 to €1,100). We now understand the savings culture that exists among our European neighbours.
Based on all this, we can now understand why Madrid is delaying sending information about our future pensions. From here, we trust that the general situation will improve, so that Spaniards will have sufficient income to be able to save and provide for a financially comfortable retirement.
If you are lucky enough to have a margin to save and would like us to advise you on how to do this so that you don't face a disappointing pension, please contact us. Our Savings and Investment Department will help you to increase it.
