Are you really aware that if the average life expectancy is 83 years (and increasing) You will be retired for a minimum period of 17/20 years during which you are going to have to live on your pension, and you have to entrust that pension to the government of the day?
It is paradoxical that this question begins to haunt us all, precisely as we approach retirement age, but if we begin to address the problem much earlier, and even from the moment we enter the labor market, we could achieve a much more fruitful result at the beginning of our passive work situation.
When I spoke to my father about his imminent retirement, he used a very short but powerful phrase: “How You See Me You Will See You”. That profound reflection had a flaw: IT WAS NOT ENTIRELY CORRECT. Let me explain: for him reaching retirement meant having GUARANTEED in advance an income that would allow him to live, let's say... with some comfort, and that the same would happen to his children and grandchildren.
This guarantee was provided by the current pension system based on the principle of solidarity or distribution so that pension contributions People who work today generate enough funds for Social Security to pay pensions.
He said that it was not entirely correct, because for the aforementioned guarantee to be fulfilled, 2 basic principles had to be met:
- Maintain unemployment rates between 4%-6%.
- Present a population pyramid with a base wider than the top.
And for years, the unemployment rate has not decreased from 15%, the aging of the population is accelerating, and this distrust increases with the contradictory messages that political parties send about the security of the public pension system.
What has been said clearly indicates that the system in which my father trusted is not going to maintain itself over time. It is clearly an unsustainable system, and we cannot hope to make it sustainable, given the increasingly lower contributions in number and amount, so they would have to be worked on by increasing taxes.
It is already a clear symptom when one's own Bank of Spain advocates abandoning the aforementioned distribution system, and moving to the “Austrian backpack” That is to say, the monthly contribution made by the company as a contribution for that worker is dedicated to that worker, so that these contributions accumulate in his or her “backpack” until the moment of retirement, and in the event that he or she changes job, the take it with you (which would encourage job mobility), or if you were fired, the compensation that would correspond to you would be the contents accumulated in your backpack. This model seems to be valid for the sustainability of pensions, But its detractors argue that it could mean, on the one hand, an increase in labor costs, and on the other, that, for active people, in the event of dismissal, they would have the compensation they carried in their backpack, without distinguishing between permanent or temporary.
Reading the previous paragraphs leads us, given the uncertainty of the amount of our future pensions, to obligation to resort to different savings/capitalization systems.
The debate intensifies when the main product that more or less served our purposes: Pension Plans also lose attractiveness year after year.
Let me explain: we cannot forget that the main differentiating element that the Pension plans compared to other pension products is the tax advantage that comes with the tax deduction of the contributions, directly from the Personal Income Tax Tax Base, But let no one forget that it is neither more nor less a deferral in the time of their taxation, since at the time of retirement when we receive the accumulated funds, either in the form of income or in the form of capital, they will be taxed as Net Work Income. But in addition, this advantage tends to disappear, if until a few years ago, the maximum amount of the deduction was in general 8,000 euros (it could be increased in certain cases), in 2021 it has been limited to 2,000 euros, and for 2022 it is set at 1,500 euros.
So what alternatives do we have?… (to be continued)
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