What is the Sustainability Factor?

The Sustainability Factor is one of the two new variables added by the approval of the last reform of the pension system in 2013.

The first is the annual revaluation index (IR),  which replaces the CPI and has been applied since January 1, 2014. The revaluation index considers variables that affect the total income and expenses of the system and other parameters—used to establish the number of contributory pensions.

In no case may it be less than 0.25% or greater than the interannual variation of the CPI as of December of the year before its application, plus 0.50%.

It affects all pensioners, current, and future.

The second is the Sustainability Factor (SF), which affects the calculation of the first pension of the new retirees, adjusting the amount of the assistance to the life expectancy that exists at that time. The 2013 reform established that its entry into force would be on January 1, 2019, with revisions every five years based on the evolution of life expectancy.

It affects new retirees as of 2019  or if the current General State Budgets processed in the Cortes are approved as of 2023.

Why is the Sustainability Factor introduced?

Life expectancy has increased steadily and considerably in recent decades, and, fortunately for all, it is expected to continue to do so in the future.

A retiree who reached the age of 65 in 1975 had a life expectancy of 15.24 years. In 2015, life expectancy at the same period had increased by more than five years to 20.84 years, and it is projected that in 2036 life expectancy at 65 years will be 23.45 years (average between men and women according to INE data).

The Sustainability Factor is implemented to receive the same amount throughout their retirement as if they had retired earlier; that is, they will receive the same amount even if they live longer since the monthly pension will be lower to adjust the increase of life expectancy. This will ensure that pension spending varies minimally in the coming decades. However, the forecast is that current and future pensioners will live longer, and therefore the number of pensioners will increase by more than 6 million people.

How will it affect those of us who retire after 2019?

We still have to wait for the final life expectancy figure to be applied in 2019, which would take the 2012-2017 period as a reference if we use the data published in the documents attached to Law 23/2013, which regulates the application of the Life Expectancy Factor. Sustainability and we analyze the simulation for a person who is 40 years old today, only by applying the sustainability factor  (without taking into account the revaluation index),  his first pension would be reduced by 8.88%.

Applying a constant appreciation rate of 0.25% to the above example instead of an inflation rate of 1.3%, if we consider that your life expectancy at age 67 is 20.85 years and that your If the contribution were €24,000,  the worker would stop receiving a total of €111,126.43 throughout their life as a retiree, which is 18.14% less than if the sustainability factor and the rate of retirement were not applied. Constant revaluation of 0.25% lower than inflation.

If the delay in its implementation from 2023 is approved, considering the calculation of the five years 2017-2022, the pension reduction would be even more significant. The expected delay would only “save” those who retire between 2019 and 2023.

Practical simulation of the effect of the Sustainability Factor:

In short, whether or not the 2013 pension reform is maintained in its current form, what seems clear is that  at some point, the public retirement pension will have to be reduced  for the following reasons:

  • We have one of the most generous public retirement pensions in Europe since, on average, a Spanish retiree receives 80% of his last salary as a pension.
  • The salaries of the new retirees are much higher than those of the current retirees  (therefore, the new pensions are much higher).
  • The public pension system is a pay-as-you-go system in which workers’ contributions are used to pay existing retirees’ pensions without accumulating any savings.
  • As life expectancy increases, retirees receive a pension for an increasing number of years.
  • The aging of the  Spanish population, due to the low birth rate, means that there are fewer and fewer workers contributing to pay pensions.

Therefore, it is increasingly necessary to plan our retirement by turning to private savings properly. We are convinced that the best way to alleviate the loss of purchasing power awaits us is by contracting classic or traditional ownership of life insurance, which are those long-term life insurance policies that, from the outset and throughout its duration, fully guarantee both the capital and the guaranteed profitability at maturity.

The decrease in public pensions is a reality that will come. Surely additional reforms await us that seek the sustainability of the system and the comparison of our pensions with the rest of the countries around us.

By Cary Grant

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