Abstract
The literature has addressed the problem of pensions and has reached an almost unanimous conclusion that increased longevity is the main cause of the problem. However, in our opinion, longevity itself is not a problem and, therefore, should not be the cause of the problem of pensions. The real challenge for the sustainability of pension systems lies in a series of characteristic behaviours throughout the life cycle of a person that are motivated by increased longevity. The pension problem is therefore due to the lack of adaptation of pension systems to these vital behaviours and the fact of forgetting the initial purpose for which social security systems emerged: to ensure the ‘great old age’ and not properly determine the age of the ‘great old age’ and the needs associated with it. In this work, the limit between the active and passive phases of the life cycle is determined as the retirement age, which has maintained the rhythm of adaptation required by the ever-increasing longevity. Rebalancing resources and life cycle needs are also discussed, with particular attention to the economic needs from the current age of legal retirement. Given that neither the various reforms on the pay-as-you-go (PAYG) systems nor converting them to a funded system seems to solve the problem of sustainability and adequacy of pensions due to the various problems associated with each scheme, this work has been advanced and proposes the creation of a ‘deferred mixed system’. This system is divided into two pillars, one defined as an individual capitalisation insurance that would cover pension between voluntary retirement age adopted by workers until the age of that ‘great old age’, so that until this age workers will finance their own pensions with their own savings or with a contribution by their full wage salary (paid either by the employee or the employer), and another one structured as a system of public distribution with NDC, where the current workers finance the pensions of people who have passed the age of ‘great old age’ at the same time as they are accumulating actuarial rights for their state future pension.
Keywords
- Pensions
- Longevity
- Great old age
- Deferred mixed system
- Life cycle
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Notes
- 1.
However, life annuities and other similar products are flexible enough to accommodate any of the saver’s desire about the recovery of part, or all, of the premium contributed for the acquisition of the product. See Galdeano and Herce et al. (2017) for a complete characterisation of annuities.
- 2.
In fact, each new worker entering the system will live longer than the worker he/she replaces and, given the current pension schemes that make the system already unsustainable in most countries, this will only increase this unsustainability.
- 3.
The adjective real refers to being obtained from contributions and pensions calculated in real terms and not in nominal terms.
- 4.
The social security contribution rate in Spain is based on common contingencies, which include disability, widowhood, orphanage and retirement. Retirement expenditure in relation to all benefits generates that out of the total rate of 28.3% we can consider that 17% is the contribution rate for the retirement benefit.
- 5.
This rate has been calculated by obtaining the contribution rate weighted by the cost ratio of expenditure on retirement pensions on the total benefits expenditure of the system.
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Domínguez-Fabián, I., del Olmo-García, F., Herce-San Miguel, J.A. (2020). Reinventing Social Security: Towards a Two-Step Mixed Pension System. In: Peris-Ortiz, M., Álvarez-García, J., Domínguez-Fabián, I., Devolder, P. (eds) Economic Challenges of Pension Systems. Springer, Cham. https://doi.org/10.1007/978-3-030-37912-4_20
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