March 4, 2021

The pension system, pensioners and common sense




Common sense is the least common of the senses. We have heard this statement many times that experience shows that it is as accurate as it is difficult to act on it. When problems are not approached with logic and common sense, the problems get worse and the solutions are harder to find.

The pension system:

It is surprising that after so many years knowing the problems of the pension system, the internal logic of the system, which is based on the sointergenerational lidarity. In other words, European politicians decided in their day that active generations would finance thepensions of passive generations, and made this system one of the three pillars of the Welfare State.

No complex mathematical explanation is needed to understand why the system has gone into technical bankruptcy: the working generations are less and less numerous, due to the decrease in the birth rate and the increase in unemployment, and their contributions are not enough to cover the pensions of some retirees, which increase every year, due to the increase in the average age lifetime. For this reason, equality breaks down and a growing deficit appears, which is unaffordable for the System.

The point of view of the person, who contemplates with amazement and disbelief, that after contributing throughout his working life, when he knocks on the door of Social Security to collect his pension, he is told: Sorry, now we can’t pay you what we promised you back in the day, because there are not enough workers contributing to pay you the pension that corresponds to you. The only one they propose is that you «pay the duck» and that it is willingly assumed that each year that passes, it receives a lower pension, because the system does not allow for more. Is there anyone who understands this situation outside of all logic and common sense?

Proposed solutions:

Politicians, who apply a different logic when they are in the opposition than when they are in government, do not dare to «take the bull by the horns » and clearly say that the System has gone bankrupt and there is no one to save it without taking drastic measures. The only cool solution they can think of is go to the General State Budgets via taxes, to balance the System. In this way, the financing of the system would be loaded twice on the shoulders of the citizens: when they contribute to Social Security, and when they pay taxes each year.

In the case of continuing with the current System, what are the possible solutions?

The “positive”: Increase the birth rate and reduce unemployment, so that the employed population increases, that is, the one that contributes. This solution does not seem easy or fast.

The “less positive”: 1. Delaying the retirement age, taking into account the average increase in life, so that the number of pensioners decreases. In this way, it is possible to work and contribute more years and reduce the total number of pensioners. 2. Increase the number of years for the calculation of the regulatory base on which the pension is calculated, so that as the years for the calculation of the base increase, the pension obtained is lower.

Common sense solutions

1. Keep current system reducing the contribution bases, so that it is aimed at covering vital minimums for all citizens. From there, institutionally create a capitalization system, based on the savings that each person makes throughout their working life. The management of these funds would be carried out by specialized entities, under the conditions and supervision of the State, as is already the case in other countries.

In this way, the pension that corresponds to the public system would be added the private complement as a function of capital that has accumulated. As the accumulated fund would belong to the person, in the event of death, it would continue to be collected by his heirs, thereby suddenly solving the current problem of widowhood and orphan pensions. The company could collaborate in the capitalization process, in exchange for greater flexibility, as in the case of the Austrian backpack. The Swedish model bets on a similar formula.

If the problem of pensions is approached with realism, You can find solutions such as the proposals or other similar ones, but all based on common sense, although as we all know well, it is the least common of the senses.

Sandalio Gómez López-Egea, Emeritus Professor at IESE


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