Towards a more inclusive, sustainable and educational pension model

The European Commission has warned of a projected decrease in the pension replacement rate, which currently stands at a generous 80% of previous salary, but could be reduced to 50% in the next two decades. This decline is not just speculation, but a projection based on demographic and economic data that reflects a worrying reality: a rapidly aging population and an insufficient birth rate to sustain the population pyramid.

The pay-as-you-go system, in which current workers fund retirees’ pensions, is under pressure due to the increasingly unfavorable ratio between young and old. This model, although fair and supportive, is not sustainable in the long term without significant reforms or additional complements.

Furthermore, inflation erodes the real value of the pension, while life expectancy increases, meaning that pensions must last longer. Without private investment or additional savings, public pensions may not be sufficient to maintain an adequate standard of living.

Mixed pension model

The future of pensions in Spain must move towards a mixed model where the public pension is complemented by private savings. This not only spreads risk between the public system and individual savings, but also encourages personal responsibility in retirement financial planning.

On the private savings side, it is key to promote Individual and Business Pension plans. These options not only allow for significant tax deductions, but also promote long-term savings and investment. By offering employment plans, companies not only contribute to the future well-being of their employees, but can also benefit from tax incentives.

According to data from Inverco, employment plans, which have reached 2.7 million participants, register an increase of 42% compared to 1.9 million in September 2022, when the reform was approved to promote this savings model for retirement promoted by companies for their workers, by self-employed groups and in public administrations. These plans add up to a volume of assets of 38,488 million euros, 11.6% more than in September 2022. Most of the growth has occurred in the construction and self-employed sector.

However, only 1% of Spanish companies currently promote pension plans for their employees and only 10% of workers have this retirement savings instrument.

This mixed savings model will also allow for greater financial education of the population, who will be able to better understand the importance of savings and investment. Not only for retirement, but also to have healthier and more profitable financial habits. Better financial education will help you understand how investing in assets with growth potential, such as equities, is a more effective long-term strategy than traditional investment in deposits or fixed income.

Benefits of pension plans

Pension plans offer immediate tax deductions that can reduce the tax burden. In addition, they allow investing in products that can grow over time, potentially outpacing inflation and offering a return that the public system cannot guarantee.

Employment plans additionally offer employees, companies and the self-employed a greater opportunity for savings and tax optimization. In this way, contributions made to any pension plan are 100% deductible in personal income tax when filing the income tax return.

This social benefit, usually associated with large companies, now also provides several advantages to SMEs, from social aspects to tax savings and operational efficiency. Furthermore, for the worker, they constitute a considerable savings method, thanks to their tax benefits. Thus, to the maximum 1,500 euros of income for individual plans, 8,500 can be added for company plans.

In the specific case of the self-employed, in addition to the savings it represents for retirement, the other great advantage of these pension plans is the deduction that they can make in the INCOME declaration, which amounts to 4,250 euros per year. Adding this amount to the 1,500 euros deductible for contributing to an individual pension plan, self-employed workers can reduce up to 5,750 euros per year from their tax base for Personal Income Tax (IRPF).

In short, the debate on pensions in Spain is not only a question of economic policy, but also of social justice and personal responsibility. The need to supplement the public pension with private savings is evident, not only to ensure a stable economic future for retirees but also to relieve pressure on the Social Security system.

It is time for both the government and society as a whole to look towards a more inclusive, sustainable and educational pension model, where each individual has the opportunity to ensure their own well-being after retirement.

To this end, at Cobas Asset Management we promote financial education and make different investment solutions available to savers for long-term savings, from investment funds to individual pension plans and plans for the self-employed and companies.