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Spain Gets Smart on Pensions


This week, Spain is pushing a new pension reform plan that could help put the country’s shaky pension system on stronger footing. Amid a number of minor tweaks, the plan’s major change would be to link pension payments to life expectancy—meaning that as life expectancy rises, the annual payout would decrease to make the funds last longer.

The plan remains controversial, particularly among employee unions. But Spain’s situation has become so dire that Brussels is adding pressure on the government to bring the costs in line any way it can. Reuters explains just how bad things have become:

The number of people contributing to state pensions has fallen to its lowest level in a decade after nearly 6 million Spaniards lost their jobs and stopped paying into the system, which supports 9 million pensioners.

That forced the government, which is still struggling with a recession and budget cuts as it tries to reduce its deficit, to twice tap its social security reserve fund in July to help with extra summer retirement payments.

Spain’s plan is sensible, and American cities should also consider making such a move. Like Social Security, a number of public pension plans were designed for a time when workers’ lifespans were much shorter. People relied on pensions for support during the relatively brief period between retirement and death, not for maintaining their pre-retirement standard of living for twenty or thirty years after they’ve finished working. Plans like Spain’s would encourage workers to work longer if they want to receive the higher benefits they expect, even if the retirement age hasn’t been raised. Fortunately, modern medicine and the shift away from physically demanding manual labor jobs toward a service economy has made it easier than ever before for people to work well into their 60s and 70s. It’s time that our retirement systems adjust.

[Spanish flag image courtesy of Shutterstock]

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  • Pete

    It makes sense.

  • Jacksonian_Libertarian

    This isn’t a good solution, it basically just kicks the can down the road. In Chile, they set up a system with individual accounts, where 50% of each person’s Social Security payment went into their own account, and could be willed to heirs if any was left unused. This system permanently solved Chile’s pension problems, while at the same time creating a huge pool of money to finance Chile’s economy. The Ponzi scheme pension system was turned into an investment scheme pension system using the most powerful force in the universe (Compounding Growth).

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