On pensions: a perspective through Pensions at a Glance

The demographic change brought about by population ageing is creating - and will create even more - financial pressures on societies. Various projections indicate that spending on health, care and social protection will increase in the coming decades. This is both a challenge and a great opportunity to rethink the functioning of the welfare state, ensuring that tensions between different interest groups are adequately resolved and guaranteeing the maximum well-being of individuals in society.

One of the pillars of the Welfare State is social security1 and this includes the public pension system. In Spain, pensions can be contributory - among others, there is a contribution requirement - and non-contributory - it is not necessary to have paid contributions to receive them. Demographic change will undoubtedly affect this system and, in particular, retirement pensions. The debate on how the system should be redesigned is lively and not surprisingly so: the pension model chosen will completely condition the material reality of the elderly for - not "in" - the decades to come. 

The Organisation for Economic Co-operation and Development (OECD) produces a book and infographics2 on the situation of pension systems called Pensions at a Glance. In this post I will comment on the latest book available, eighth edition, published in 2019 and focused on analysing pension systems in OECD countries between 2017 and 2019. 

In the opening editorial, the book focuses on a problem that needs to be addressed and that also affects the pension system and future pensioners: pensions for non-standard workers. Non-standard workers are temporary, part-time, self-employed workers. Non-standard workers represents according to the OECD one third of total employment in OECD countries and can range from 20% in Eastern Europe to as much as 46%. In addition, there is an over-representation of women - part-time, young and low-educated workers in this type of work. They point out that, in addition, these workers have other problems such as less job security, more job stress and lower job quality in general. If social protection systems were built on the premise of stable and linear careers, what happens to workers who fit this profile? Let's think of workers who work through a temporary employment agency, or self-employed people who run small businesses such as a bookshop or a neighbourhood shoe shop. In the second case, even if they make discretionary contributions and join the pension system, their contributions tend to be lower than those of standard workers with similar incomes, and this will generate lower pensions. This is also the case in Spain, where a large proportion of the self-employed pay contributions at the minimum rate and, on occasions, due to structural issues and the economy itself - personal and collective - their choice is between income today and income in the uncertain future. They add, therefore, that it would be important to improve coordination between contributory and non-contributory programmes in order to guarantee a good level of income for older people who have been non-standard workers. Some measures to improve coordination would be to convert first-tier pensions into universal flat-rate benefits, to move out of this safety net progressively with the level of income, or a mix of both: offering a universal and an income-dependent part.

The book also highlights the most important reforms in the years studied among the selected countries: 1) limiting the increase in the retirement age or extending early retirement options, 2) increasing the retirement age, 3) favouring work incentives, 4) increasing the level or extending the coverage of first-tier pensions, 5) increasing benefits while reducing contributions for low-income earners, 6) suspending the adjustment of pensions with demographic change, 7) bringing public pensions closer to private pensions, 8) changing contribution ratios or expanding contribution options, 9) expanding mandatory pension coverage or developing automatic enrolment programmes, and 10) changing tax rules for pensioners. Between pages 48 and 64 they detail in a table what these reforms are by country. In summary, and in general, the main measures include making the number of years needed to receive a pension more flexible, increasing benefits, extending coverage or favouring private savings. On the other hand, they predict that the normal retirement age in the OECD for a person who starts working at the age of 22 will be, on average, above 66. If we consider the case of Spain, with youth unemployment rates close to 40%, the problem becomes more complicated. 

Another of the book's chapters focuses on the demographic and economic context, analysing six indicators: number of births, increase in life expectancy, number of older people out of the number of people of working age, employment rate of older people, effective age of exit from the labour market and life expectancy after leaving the labour market. 

On the number of births - the fertility ratio, calculated as the number of children per woman of childbearing age - the OECD average is 1.66 and they consider that to keep the population constant, the number of children would need to be 2.1 - this number is called the replacement rate. The explanation for the low fertility rate is due to various factors ranging from the material precariousness of youth to changes in value and social systems. From a social, economic and political point of view, public policies must go in the direction of offering greater protection for motherhood.

Regarding life expectancy, they indicate that this increase is one of the greatest achievements of this century and is expected to continue to rise. In the period 2015-2020, life expectancy at birth stands at 78.1 years for men and 83.4 years for women. Given this figure, public policies must guarantee an adequate level of income for the elderly and ensure that their quality of life is as high as possible in order to mitigate the costs associated with illnesses related to ageing itself. Healthy ageing policies are key.

The ratio of older people to people of working age - the number of people over 65 to the number of people between 20 and 64 - is 31 per 100 on average. They point out that 30 years ago the figure was 21 per 100 and is expected to rise to 53 per 100 in the next 30 years. This ratio depends on fertility, mortality and migration. In Spain, this ratio is 32.8 and is expected to be 78.4 out of 100.

The employment ratio - people in work over total number of people in their age group - of older people decreases with increasing age and there is considerable variation by country among 55-69 year olds. On average, it stands at 72.5% for people aged 55-59, 49.6% for people aged 60-64 and 22.3% for people aged 65-69 in 2018. 

Regarding the effective - non-normative - exit age from the labour market, the average stands at 65.4 years for men and 63.7 years for women in 2018. This is calculated as the average exit age from the labour market for workers over the age of 40. Regarding life expectancy after leaving the labour market, the average stands at 22.5 years for women and 17.8 years for men. This indicator has been increasing over the years and undoubtedly implies a greater use of public and private resources to guarantee a dignified old age. 

On the other hand, based on a working paper prepared by Ayuso and Chuliá in 2018, I will comment on the situation of the gender gap in pensions in Spain. The authors indicate that the gender gap in pensions in Spain is below the EU average if we use the income received by pensioners. However, the gap widens - above the EU average - if the total elderly population is considered and this is due to the fact that women do not have a contributory pension. As they have had less participation in the labour market - sometimes none at all - they do not receive compensation like their male counterparts. Moreover, as long and continuous careers were favoured at the legal level, an advantage was created in the men's group. Currently, the regulations discriminate positively in favour of women - maternity allowance - but they consider that the legislation comes into force at a time when the gender gap is decreasing among new male and female retirees due to social changes and the increased weight of women in the labour market in recent decades. They consider that Spain is currently in a transition phase towards a more egalitarian pension system. 

In conclusion, in complex societies, solutions are complex and this is due to the intrinsic multi-causality of social processes. Although in the past, the social sciences tried to emulate the natural sciences such as physics in terms of simplicity - relatively simple, but not simple formulas to explain complex problems - the present shows us that this vision in our disciplines is limited. The same is true in the field of pensions, and improving current pension systems requires multidisciplinary research groups to consider and address the challenges comprehensively in order to create the best opportunities. As always, the aim is to improve the material reality of older people and their quality of life.    

1.The others are health, education and long-term care.

2. In addition, you can also visit other interesting OECD documents of the type at a Glance. Among others: Health at a Glance or Education at a Glance. Some of the reports are annual, others are biennial or do not have a specific periodicity.