How to Redesign Spain’s Pension System

Prof. Javier Díaz-Giménez leads session in Madrid

23/04/2013 Madrid

Javier Díaz Giménez

Spain’s pension system is obsolete, unsustainable and requires deep, immediate reform, IESE Prof. Javier Díaz-Giménez said during a Continuous Education session, held April 22 on IESE’s Madrid campus.

Prof. Díaz-Giménez discussed the system’s structural problems during an event titled, “The Serious Problem of Spanish Pensions and a Radical Proposal for its Solution.” The talk was organized by the IESE Alumni Association as part of the conference series “Economy and Society: Proposals for a Dynamic, Innovative and Fair Economy.”

“We have to double savings for retirement by redesigning the current distribution system and complementing it with capitalized plans,” said Díaz-Giménez. “We need another distribution system that is entirely contributory, with a contribution from the worker that is well-defined by law and is not capped.”

He reminded the audience that in just 27 years, Spain’s pension system has undergone six reforms. “The social security administration today does not provide precise information about future pensions,” he said. After criticizing public administrations for spending all the funds accumulated in their piggy bank, he called for a system based on “a mix of contributions, in which the contributory portion must be guaranteed.”

He pointed to Sweden, where contributors spend about 2.5 percent of their contribution on obligatory personal pension funds that are managed by a state agency.

“When you compare Spanish pensions with others around the world, you realize they couldn’t be worse,” he said. Obligatory pensions should be understood as a type of “forced savings for old age.”

“They are really like a deferred salary. Workers give part of their rights for the current GDP in exchange for rights to receive GDP in the future. But these future rights are uncertain. If there is no GDP, there are no pensions,” he warned.

"Minimum Pensions are Different"

“Today’s pension system problem has been caused by changing life spans, as well as issues related to demographics and the cost of managing savings in the long term. People are living longer, starting to work later, birth rates are dropping and the growth rate of young people and adults is flat. All these factors, in the long run, influence the sustainability of the system,” he said.

Díaz-Gimenez also argued for a clear separation of non-contributory from minimum contributory pensions, “which are something different.”

“Minimum pensions should be understood as an expression of our solidarity with older generations. They should be funded from the state budget and should be focused, that is, based on an income threshold and patrimony,” he said.

To carry all of these initiatives out, Díaz-Gimenez called for the creation of a Pensions Agency in Spain, centered solely on contributory pensions.