Requiem for retirement at 65

Valentín Bote. Professor. IE Business School

9 March 2011

Spain’s pension reform is a move in the right direction, having upped both the retirement age and social security contributions. It’s the only way to keep the current intergenerational system going.

After the agreement reached by two of the sectors that are most resistant to the economic reforms in Spain (the national government and the trade unions), the Cabinet of Ministers yesterday launched the pension reform with a report by the Minister of Work and Immigration that sets out the main points of the aforementioned reform in black and white and which had recently been announced in the media. One of the things that is to be amended and that has the greatest impact (not only in the media, but also on the economy) is retirement age.

One positive aspect of the reform is the breakaway from the gold standard age of 65 years, which has been a reference in the past. It is the age that was established in the United States in 1935, under President Roosevelt, and that which, after a reduction, since it was initially set at 70 years, was adopted in Bismarck´s Germany at the end of the 19th century. At the time, said age was adopted in response to criteria of sustainability from an actuarial point of view. And it is clear that life expectancy at birth and that of those who reach 65 years is much greater now than it was then. Therefore, one point in favour of the reform, which, let’s not forget, is still only a draft bill, which means that at the present time we still don´t know for sure what our pension system will be after it has passed through Parliament, is that it has broken down that mental barrier of considering 65 years as an untouchable age and it has taken it to the age of 67 as a standard figure.

Undoubtedly there are exceptions, as there are in the current system, whereby most workers retire before they reach the age of 65. Consequently, after the reform, it will still be possible to retire before 67 and collect a full pension. But the requirements will be stricter than they are at present. Accordingly, it will be necessary to have paid in for 38.5 years to retire with a full pension at 65, which means increasing the number of years required today by 3.5 years. However, it is a progressive increase, which will not come into full effect until 2027. It will begin by increasing the workers obligation to work and pay a further month for each year between 2013 (after the general elections!) and 2019. After that year, the worker will have to work and pay two more months for every year until 2027.
If a survey was made on Spanish people, this toughening-up of the conditions would probably be unpopular. But the aim is to facilitate the sustainability of the pension system and, in short, it is a matter of "intergenerational solidarity", since everyone has to contribute to maintaining the system. This includes those who are many years from their retirement but maintain pensioners with their contributions, those who are near retirement age, and those who are now being asked to make additional efforts in the form of a longer paying-in period.

However, in my opinion, this reform has its weak points. And referring to one of them in particular is probably "politically incorrect". I am referring to the minimum pensions. First of all, a thought: why are we considering the pension reform in Spain? Basically because there are serious doubts as to whether or not the present system, without modifications, will be sustainable from an actuarial point of view. Thus, the case of the minimum pensions is the paradigm of the lack of sustainability from an actuarial viewpoint: the person who receives this type of pension receives from the system, on average, much more than they have contributed in terms of social contributions. However, the government (in a characteristically uncontrollable attack of goodwill) proposes an increase to minimum pensions; in other words, making them even more imbalanced in actuarial terms, simply because said pensions are small. That does not seem coherent with the extra efforts that are to be made by other workers.

In short, increasing the retirement age as proposed in the draft bill for the pension reform is a step in the right direction, although it is something that we knew was necessary a long time ago. Why didn´t we do it 5 years ago?

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