Diversify risks

Diversify risks

The contributory pension system of the Social Security In Spain it has not stopped being news for a long time, which is a symptom of the importance that we give to this pillar of our Welfare State.

It is true that the health of the pension system is going through difficulties and to corroborate it, one only needs to see the data of the Social Security deficit. Thus, in 2017 the contributive deficit (that which leaves out the non-contributory part, as a complement to minimums and transfers) fue of 19,000 million euros and in 2018 is expected to reach 20,000 million, which will represent 1.66% of the Gross Domestic Product (GDP). These figures, which based on hearing them are familiar to us and we do not attach much importance to them, are extraordinarily large and to prove it, we only need to put it in relation to something that is more understandable: with 20,000 million euros 50 hospitals could be built like La Fe de València, one of the most modern in Spain. A deficit of this magnitude tells us that almost 20% of contributory pensions this year are not being financed with the contributions of this year (this is the basis of any distribution system, as is the Spanish), but with debt , that in the future someone will have to pay, along with their interests.

A public debt that is already huge, since which is around 100% of GDP and that, at the moment, the interest rates that are being paid are not very high, thanks to the so-called tail winds, but which in the future will rise, making the debt bill even more expensive. This will mean that, most likely, we will have to reduce the cost of other pillars of the Welfare State, such as Health, Education, Dependency, and, why not, Pensions.

Social Security Deficit

The problem of the deficit of the Social Security does not come only from the last two years, but it comes from far. Before the crisis of 2008, that is, during the period of strong growth of the economy, between 2000 and 2007, the trend line of the balance on the GDP grew at an annual 9.5% and during the hardest stage of the recession , from 2008 to 2016, that same trend line has decreased to 38.0% per year; that is to say, the balance of Social Security has suffered a four times greater deterioration in the recession than in improvement in the expansion. This has meant that we have gone from a surplus on GDP of 1.36% in 2007 to a deficit of 1.66% in 2018. This sudden change has meant that the Social Security Reserve Fund has almost disappeared and that In addition, the Social Security has had to borrow for an amount of 25,000 million euros between 2017 and 2018.

The next question that can be asked is whether the deficits of recent years are temporary or structural. For this we are going to use what is called the structural balance of the pension system, which uses an 11-year moving arithmetic mean centered on the year of calculation. It is observed that there is a tendency to increase the structural deficit in recent years, reaching 2018 to 17.5 billion, somewhat lower than the contributive deficit of that year, which indicates that the problem of the pension system is not only conjunctural – especially as a consequence of the crisis- but there is a very important structural component, due to the actual configuration of the system.

And the next thing to ask is what will happen to the Social Security balance in the future? This question is not easy to answer because the pension policy has undergone continuous variations. The pension reform of 2013, which includes two automatic adjustment mechanisms: the Sustainability Factor (FS) and the Pension Revaluation Index (IRP) and which should serve to isolate the pension system from the continuous legislative changes is, in practice, suspended. If, as it seems, the revaluation of pensions is going to be carried out according to the Consumer Price Index (CPI), this is going to assume, according to our calculations, that a contributive surplus will never be able to be obtained and, in addition, the deficit annual contribution will be increasing. In the most likely scenario, the calculations show an annual contributive deficit of 2.76% of GDP in 2030, of 4.19% in 2040 and of 4.87% in 2050. This important problem can be analyzed from another perspective if what we do is calculate the accumulated deficit until different dates. Thus, the cumulative deficit from 2018 to 2030 would represent 23% of GDP, from 2018 to 2040 would be 47% and would reach 74% of GDP if we accumulated the deficit between 2018 and 2050. These figures should make our politicians reflect because The situation that we present here is almost unsustainable and measures should be taken so that current and future members do not have to reach this situation.

Against this background, international organizations inform us that the substitution rate (defined as the quotient between the initial pension of a retiree and his last salary) is in Spain the highest of all the countries of the European Union, since it reaches 78.7%, while the average of the European Union is 45.1% and, for example, in Germany it is 37.8%. It is also warned that this rate will not be able to be maintained in the future and could suffer a significant decline in Spain, although it is difficult to quantify.

Therefore, it seems clear that before or after problems will arise in the public pension system and should complement the future public pension with private savings. Moreover, even if we thought that the public system was not going to have problems, the principle of risk diversification should lead us to invest in other assets.

In particular, one of the possibilities is the Pension Plans (PP). Of course it is not the only one and even, in some cases, it may be an unprofitable option for certain individuals. Why? Because it is worth remembering that PP and other figures such as Insured Pension Plans have a special taxation: contributions (with certain limits) they deduct from the taxable income of the IRPF at the marginal tax rate of that year, but, when the accumulated amounts are recovered, these are considered work income, increasing the taxable income of the IRPF and taxing the marginal rate of that year.

In short, if my marginal rate at the time of the rescue is greater than at the time of the contribution, I will have a fiscal financial return (with taxes) that may even be negative, even though the financial profitability is positive. And this can not happen with any other financial product. Therefore, we must be careful with the rescue of the PP.

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