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The impact of COVID on pensions

by alex

The digital meeting “The impact of COVID on pensions” held last Friday, June 26, was attended by two of the 100 experts that the Government has appointed to advise on the post-COVID era and prepare a proposal document called “Spain 2050”.

The document of proposals “Spain 2050” is in the phase of reflection or diagnosis, without yet receiving proposals or solutions for debate.

José Antonio Herce and Rafael Domenech participate in the “Longevity” working group with an analysis of the future of the pension system and the changes that will occur in the elderly care sector.

Pre covid situation

Pension spending was already poised for a sizable increase before Covid-19 hit the scene, with the baby boomer generation starting to reach retirement age in the next decade.

To this massive increase in the retirement age must be added additional demographic pressure due to the increase in life expectancy, with retirees who are increasingly pensioners for longer.

In the past year, 2019, Social Security already had a deficit of almost 17,000 million euros, and the COVID effect in 2020 will increase that deficit as a result of a crisis that will affect GDP and, as a consequence, the income of the pension system. On the other hand, spending will continue to increase due to the increase in the number of pensioners and the replacement rate (Pension/Last salary) of the new pensioners who access the system.

Although the problems are not new for the Spanish pension system, we find ourselves in a situation in which the need for reform becomes even more pressing. “Because pensions, as they are designed today, are not going to be able to be paid: we need changes that make pensions payable, sustainable and sufficient,” declared José Antonio Here.

The coronavirus will have an impact in the short, medium, and long term. The Employment Plans and complementary social security products will suffer a drop in contributions, and Social Security will also see its contributions decrease. The increase in unemployment will create gaps in the working life of workers, and early retirement will increase spending on pensions.

Proposals to face the reform of the Pension System after the Covid19 crisis

According to Here, the Toledo Pact must take up two issues that were about to be approved before the meetings were stopped:

  • Approval of the use of the pension revaluation index (IR)
  • The entry into force of the Sustainability Factor.

These two factors affect the number of future pensions, the first of which the IR would replace the CPI for the calculation of the revaluation of pensions, taking into account variables that affect the total income and expenses of the system, in addition to other parameters, to establish the number of contributory pensions.

Regarding the Sustainability Factor, once its implementation is approved, it would affect the calculation of the first pension of the new retirees, adjusting the amount to the life expectancy of the year in which they retire. The result of said adjustment may mean a decrease of 10% in the amount of that first pension.

In addition to these two measures, approved in the 2013 pension system reform and not yet applied, other issues must be addressed, such as:

  • Take into account the entire working life to calculate the regulatory base.

Currently, 23 years are taken into account, increasing one year until 2022, when 25 years will be taken as the period for calculating the pension.

  • Reestablish the actuarial equivalence between what has been quoted and the benefit that is charged.

When new pensioners enter the system, the value they receive is higher than what they have contributed, with an average imbalance of 30%.

  • Introduce alternative sources of financing through complementary business social security and individual voluntary savings. In short, a worker’s retirement pension becomes a decent pension made up of the public pension and the supplementary pension (second and third pillar).

In this last point, the need to have a private guaranteed savings system that contributes to alleviating the uncertainty of receiving a decent pension and also enjoying tax advantages either during contributions, such as the Assured Pension Plans, becomes stronger. Or at the moment of receiving the guaranteed capital if the savings are implemented through Classic family health Insurance.

For his part, Rafael Domenech proposes measures to reduce the shadow economy and improve the efficiency of the tax system. Regarding the pension reform, he specifies the following:

  • The distribution system of National Accounts.
  • Extend the professional career so that, on the one hand, the actuarial deficit of the system is corrected, and on the other, the possibility of higher public pensions is generated.
  • Complement the public pension through a complementary occupational system, with a single account per worker and with public or private investment management at the worker’s choice.
  • Implement the Austrian knapsack system that would cover the case of dismissal and that if it is not used, it is capitalized for retirement.

In short, “The crisis is going to leave the public accounts with a very large deficit this year: if we do nothing to start guaranteeing budget stability from 2022, doubts may arise about sustainability”, according to Rafael Doménech.

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