Spanish retirees receive through their pensions an average of 51% more than what they once contributed to the tax system, according to a report by the Institute of Spanish Actuaries (IAE). In the opinion of this group, this imbalance should be corrected as soon as possible so that the system for calculating contributory pensions is viable in the future.
The report “Actuarial Equity Factor of the contributory system of Spanish retirement pensions” is part of the monitoring of Social Security that the IAE has carried out since last year. According to the study, that extra benefit that the pensioner receives is financed through public debt or taxes of the rest of taxpayers.
To reach this conclusion, the IAE has “defined and applied” an Actuarial Equity Factor (FdEA), which has obtained an average value of 1.51. With this factor, if the number were below 1, the pensioner would be receiving less than what would correspond to him, while when exceeding the value of 1, he would receive a higher benefit than he should. To have an “actuarially fair” pension system, the FdEA should be 1.
The current model also presents complexities in the retirement age, since workers who retire with the same years of contributions but at different ages they do not get the same pension, economically favoring those who stopped working at a younger age.
This situation reflects, always according to the report, that there are not enough incentives either to extend retirement or to delay it.
“The current architecture of the contributory retirement pension system in Spain implies that, in the vast majority of cases, the pensioner receives more than what they have contributed in their working life. It also shows important inequalities when comparing the different cases that arise of pensioners who have retired at a certain age, according to their years of contributions, since there is no equitable criterion for advancing or delaying the retirement age ”, points out the IAE as the two main conclusions of its report.
As an example, the IAE explains that this year, a person who accumulates 38 years of contributions at age 65 could retire at that age. However, if he decided to extend his active life to 69 years, accumulating 42 years of contributions, “he would benefit from a 4% premium for each year of delay.” However, a person with 65 years and 37 years of contributions who decides to continue working one year more than in the previous example, up to age 70 and accumulating 42 years of contributions, would only receive a 2.75% premium for each year of delay.
According to the technical coordinator of the study, Enrique Devesa, “there are not enough incentives to advance or to delay the retirement age, which means that the penalties for advancing it and the bonuses for delaying it are poorly calibrated. Nor does there seem to be much incentive to increase the number of years of contributions ”.
The IAE understands that the “inequities” presented by the contributory pension system could be resolved and achieve a more equitable relationship between contributions and benefits by acting on three elements: the cap of 100% of the coefficient for years of contributions; the high penalties for anticipating the retirement age, and the low bonuses for delaying it.
In this way, actuaries understand that penalties and bonuses for retirement at ages other than ordinary should be calculated in an actuarially neutral way -except for gender-, without making them depend on the years of contributions.
Likewise, the IAE report indicates that there is room for improvement to calibrate the system and make it more equitable. Thus, it emphasizes that getting GDP growth to exceed 1.59% would help improve the system without worsening sufficiency.
At the same time, it highlights the need to agree on a “logical pattern” when incentivizing or discouraging retirements based on biological age and years of contributions to the system.