As you can see, the bulk of workers will be increasingly closer to retirement without enough contributors having joined to cover their state pensions.
In other words, the aging of the population and increased life expectancy will exacerbate the current imbalance in the pension system.
High pensions vs. declining wages
The country’s demographic evolution is the greatest challenge to the sustainability of the pension system, but it is not the only one.
As a complex model, there are other factors that influence the adequacy of pensions in Spain. One of these is the relationship between what pensioners receive and what workers are paid, which is directly related to what they contribute to the system.
To help you understand this better, remember that your state pension depends on the number of years you have made contributions (time you have worked), but also on the amount you have paid in. In other words, the higher your salary as a worker, the higher your future state pension will be.
At present, the average retirement pension is 1,375.23 euros per month in 14 payments, equivalent to 19,253.22 euros per year. Meanwhile, the average salary in Spain is 22,467 euros per year, but the median salary is only 18,556 euros per year and the most repeated wage is 13,531 euros.
In addition, there is already a generation gap in terms of wages between young people entering the labor market and those who have been in it for some time. In short, the new retirees receive increasingly higher pensions, but people entering the labor market receive lower salaries.
And why is this so important? Basically because Social Security contributions, which pay for the pensions, are calculated on the basis of the workers salaries. If wages are lower, a greater number of contributors will be needed to pay for each pension. In short, another source of friction.
What could happen to the pension system?
It is very difficult to answer this question. The pension system is not static, but evolves in line with the various regulatory changes.
However, there are a number of formulas for balancing the accounts and making the system sustainable:
- Increase social contributions to cover the deficit.
- Delay the retirement age.
- Limit pension amounts (present and future)
None of these seem like very popular solutions. There is also the possibility of a more profound reform that imitates the pension model of other countries, with a more limited state pension, but which encourages private savings through company pension plans or a system of notional accounts where the pension is paid from the contributions of each worker.
In any case, making the Spanish model, as well as those of other countries, sustainable is and will continue to be a challenge in the face of an aging population.