Pensions in the future – Reality or fiction?

The debate about the sustainability of the pension system leaves a worrisome fact that we cannot ignore: the performance of pensions will fall significantly during the upcoming years. In 2025, the pension will correspond to less than 45% of the salary and in 2060 to just over 30%.

The pension system is pressured by the ageing of the population, the reduction of the labor force and the difficulties of the economy. One of the consequences of this pressure is that people who retire from 2025 onwards, will have to live with a pension that will correspond to less than half of the salary received when they were active. At a time when the economic sustainability of Social Security is once again brought up to a discussion, the big question is: Pensions in the future: Reality or fiction?

The data of the Ageing Report, a document recently released by the European Commission, shows that, when the gross value of the pension is compared with the last salary, the cuts that result from the operation of the system, as it is built today, are already significant.

Spain
 

The issue of pensions is not an issue that can be forgotten. According to a report published by VidaCaixa, for 70% of Spaniards, the pension represents their only source of income after they retire, and although the future of the pension is guaranteed from the upper echelons, there are important cuts on the horizon.

José Ignacio Conde-Ruiz, from the Complutense University of Madrid, wrote a little more than a year ago an article published in a journal of the Barcelona Institute of Economics (IEB), where he warned that in twenty years the retiree could lose up to 40% of their purchasing power.
 

On the other hand, the OECD has been warning for some time about the fact that in Spain the future of pensions is in serious danger, or at least that of the “decent” pensions. The Organization for Economic Co-operation and Development (OECD) places its focus on unemployment and the accelerated rate of ageing of the population, noting that the former is a particularly vulnerable group due to the shorter contribution periods, which translate into lower pension rights. Those responsible for the study highlight the high rate of unemployment that the country suffers (which doubles the number that existed before the crisis) and that the activity rate, that is, the percentage of people with work in relation to people of working age, is in turn quite inferior to the average. Which endangers the current pension system in its entirety.

Questioned on the subject, Ángel de la Fuente, executive director of the Foundation for Applied Economics Studies (Fedea) summarizes it as follows: “There are many ways of adjustment, with two main margins: to delay the retirement age, and that people work even if they are retired. There is no magic solution, simple and unique”, he states.

Portugal

Portugal does not escape this situation. For Pedro Marques, an economist and former Secretary of State for Social Security, the social adequacy of pensions is the big question that emerges from the demographic drama that the country is going through and that the EC report confirms. “The biggest challenge is the question of the social adequacy of pensions”, he warns. “This is where you have to take measures and those do not go through more cuts or radical changes in the system”, he argues.

Portugal is a country in which there is projected a fairly steep increase in the percentage of the elderly population compared to the working-age population. In 2013, the number of people over 65 years of age was equivalent to 29.8% of the population between 15 and 65 years old, a value very close to the average of the eurozone, which is 29.3%. But this indicator will rise to 63.9% until 2060, while in the euro area it will be around 51.1%

For Pedro Marques, it is essential to take measures within the framework of the current pension system, diversify their sources of funding, work on the side of economic growth and employment to keep people in the labor market longer and favor reconciliation between professional and family life, with the objective of promoting the birth rate. At the same time, “measures must be taken in order to reinforce complementary savings, both in public and private regimes, which would allow the reduced value of pensions to be filled”, he adds.

So, is it a systemic or circumstantial problem?

Economic sustainability depends on the combined evolution of several factors, which go well beyond the age of retirement and the conditions of access to the pension. It is necessary to look at the birth rate, the average life expectancy, the dependency ratio between assets and pensioners for the labor market and for the evolution of the economy and labor productivity.
 

The complexity of the system makes the debate around sustainability pretty difficult. Some people argue that the problem is temporary and that the record levels of unemployment do not help, to which we must add population ageing. Others understand that the problem is systemic and that its logic must be profoundly changed.