Tick, tock, tick, tock... Spain is sitting on a time bomb. The bomb is partly concealed because it is taking a backseat to the crisis, but there it is, ticking away. Until now, Spaniards never paid much attention to the key issue of how much they'll need to save to maintain their quality of life when retirement comes around. They didn't because they relied on the public pension system to bail them out. But the logic of demographics and mathematics is now questioning the sustainability of the system.
We live in an ageing society, with longer life expectancy. There are already fewer than two workers paying social security for every pensioner getting a retirement check. Experts agree that the time has come to stimulate long-term private savings.
The latest government reforms are aimed at making citizens increasingly responsible for the amount of money they'll have when they stop working. The Socialist administration of José Luis Rodríguez Zapatero introduced several reforms to the public system, such as pushing back the retirement age and using longer working periods to calculate the final pension amount. Brussels wants Spain to shorten the deadlines established in law -- which introduces the changes gradually to 2027 -- and some voices are calling for further reforms. In any case, it seems clear that the future will be less generous to pensioners than the present.
"The first step to solve this problem is to tell citizens the truth," says Carlos Tusquets, president of the European Association of Financial Advisors. "This requires high-mindedness and a political covenant. No party will want to unilaterally accept the consequences of this decision."
In Spain, public pensions are the equivalent of 81.2 percent of the last wages earned. This ratio is one of the five highest in OECD countries, where the average is just 42.2 percent. This explains why the money invested in pension funds in Spain is only 8.2 percent of GDP compared with 30.7 percent on average in the European Union, or 75.7 percent in the United States.
"Spain has no culture of foresight. We thought that the state would always be there for us. There needs to be a profound change in savers' mentality and a professionalization of financial advice. Besides that, legislation on this issue needs to be clearer, more concise and stable through time," says Julio Fernández, a teacher at the Institute for Stock Market Studies.
The first step to solve
this problem is to tell citizens the truth"
The first condition for citizens to start accumulating capital for their old age is a return to the path of economic growth. In 2012, the combination of a recession, job destruction, tax hikes and dried-up credit lines pushed disposable income down to 2007 levels. Given the situation, it is no wonder that the household savings rate has fallen far below its historical average.
The lower saving capacity is most noticeable in the kinds of products that people feel they can do without in the short term: pension plans. The net balance of contributions to individual and employer plans was 58 million euros in 2012, the lowest level since statistics have been compiled. Citizens contributed a billion euros less to pension plans, while the money that employers contributed to their workers' retirement programs was reduced by 666 million euros. Last year was the first time that public corporations did not make contributions to their workers' pension plans, and 2013 will be the same due to the government's austerity policies.
Not only is the crisis restricting contributions to pension funds, but it is also eating into the savings that many people had put aside for their retirement. Pension funds are non-liquid products, meaning that accumulated capital can only be enjoyed at the time of retirement. There are two cases when the money may be withdrawn without a penalty: serious illness and long-term unemployment. Since 2007, 324,364 jobless individuals have had to draw on their pension plans to get by. Draft legislation to deal with the ever-growing problem of evictions is now considering a new case: when the money in the pension fund can be used to stop a foreclosure.
"The necessary condition to encourage savings is reactivating the economy, but this is not enough," says Ángel Martínez Aldama, director general of the Association of Collective Investment and Pension Fund Institutions (Inverco). "We need to take the initiative. With such a high dependence rate on public pensions, there are questions about the sustainability of the current model."
The law modernizing Social Security establishes that the government must inform Congress before June 30 about the ongoing progress on the issue of complementary pensions. Inverco has already sent its own proposals to the executive, and its suggestions include introducing tax incentives for businesses and individuals. The association also provided information about the way the pension system works in other European countries, where responsibility for income substitution does not fall exclusively on the public pension system, the way it does in Spain.
"Both the public and the private systems have their advantages and their drawbacks," explains González Aldama. "The former depends a lot on economic cycles and demographic realities. The latter is exposed to market performance. It's all about encouraging a combination of both to better deal with the various threats."
People in Spain save when they can but they do so badly, say the experts
In Spain, people save whenever they can, but they do so badly, say the experts. This remains a country of homeowners and mortgages. The Family Financial Survey, drawn up by the Bank of Spain, indicates that 80 percent of a family's wealth is invested in housing. The rest, that is to say, financial investment, is only around 20 percent of total savings and clearly conservative: bank deposits are the most popular products, representing 46.1 percent of all financial assets, considerably above other countries.
Lenders' desire to buttress their balance sheets with term deposits, coupled with clients' preference for liquid assets in case they should lose their jobs and need ready cash, have resulted in investment portfolios filled with short-term assets, which are not a good way to plan for retirement.
"It is essential to work on the issue of financial education so citizens get the necessary information to make the best decisions as to what products to select and why," says Juan José Velasco, director of the Aviva Institute for Savings and Pensions.
Spaniards' lack of financial culture should theoretically be offset by easy access to sound advice. But in a country where products are commercialized almost exclusively by banks, it can be safely said that pension plans have not been sold in the most appropriate of ways. Lenders have often resorted to rather frivolous lures - such as free TVs, sets of crockery or even a leg of ham to get people to sign up. The pension plan is often also forced upon clients who actually just want to take out a loan or a mortgage.
Another mistake is to overstate the link between pension plans and tax breaks. While it is true that contributions reduce taxable income, this should not be the only advantage used by banks to sell the product. Retirement can extend over 30 years, and guaranteeing quality of life is not as simple as running to the bank the last few months of each year to make a few contributions to the pension plan and pay fewer taxes.
A key factor is profitability. Pension plans are tremendously diverse -- there are nearly 3,000 different products -- but in general their returns are nothing to write home about. Last year, an upsurge in the market in the second half of the year pushed average profitability up to 6.59 percent, but taken over a period of 15 years, average annual returns were just 2.48 percent. This is a rather discouraging figure, although it must be noted that this period includes the greatest economic and market crisis in decades. Ultimately, however, it means that managers of many pension plans were unable to even preserve their clients' wealth, since earnings were below inflation rates.
Pensions in Spain are often sold on the promise of free TVs and crockery
These modest results can be explained to a great degree by the portfolio composition of Spanish pension plans. Over 60 percent of savings put aside for retirement are invested in fixed-rate assets. Experts warn that these theoretically safer investments should only predominate in the portfolios of people aged 50 and upward.
So what is the ideal moment to start taking out long-term savings products? Asset managers say the sooner the better, but that the 30-to-35 year bracket is best. This is the time to take on added risk and invest in pension plans with greater exposure to variable rates.
The third pillar in long-term savings, besides public pensions and private pension plans, are employer plans. Research shows that there is still a long road ahead if Spain wants to reach European standards. The ratio here is 12 percent, and it is almost exclusively major corporations that offer employees 401(k)-type plans. However, 80 percent of Spain's business fabric is made up of small- and medium-sized businesses, and experts suggest introducing incentives for business owners who offer their workers some sort of pension scheme, and reducing the red tape associated with this option.
In an effort to raise citizen awareness on the issue of long-term saving, the government is planning to send everyone a letter at the end of each year with an estimate of the pension they would be entitled to at the time of retirement. Ultimately, some experts say, this may be the best stimulus of all.
"If this happens, things will change. Citizens will see that their pension will hardly allow them to keep up their lifestyles, and they will try to save for retirement," says Álvaro Monterde of March JLT, an insurance broker. "There will also be increasing demand among employees for their companies to contribute to their pension funds."