Published on Tuesday, March 23, 2021

Spain | The complementary pension systems need a boost

The pay-as-you-go (PAYG) pension system is one of the pillars of the welfare state. In order to keep people's income in retirement at similar levels to when they were working, advanced societies have developed complementary pension systems, but these are not particularly widespread in Spain.

Key points

  • Key points:
  • It is easy to demonstrate that the high benefit rate of the PAYG system is only possible with high population growth that guarantees a ratio of pensioners to contributors (i.e. the dependency rate) that is constant over time and is sufficiently low.
  • However, rising life expectancy above the effective retirement age and retiring baby boomers will result in a rapid increase in the dependency rate over the next three decades.
  • Many European countries have worked simultaneously on two fronts. The first (and most obvious) is to increase the retirement age in line with life expectancy. The second has been to incentivize contributory company pension schemes (second pillar) and individual retirement savings plans (third pillar).
  • According to OECD data for 2019, Denmark, Holland, Canada, Switzerland, the US, Australia, the UK and Sweden had between 100% and 200% of GDP in accumulated pension assets, compared to 13% in Spain.
  • Ideally, some of the existing best practices in Europe would be adapted for Spain. One of the most interesting initiatives is the Nest scheme in the United Kingdom. It began with a mandatory contribution of 2% of earnings, which was increased to 5% in April 2018 and again to 8% a year later.

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