THE SUSTAINABILITY FACTOR AND THE SPANISH PUBLIC
PENSION SYSTEM[1]
EL FACTOR DE
SOSTENIBILIDAD Y EL SISTEMA PÚBLICO DE PENSIONES ESPAÑOL
“No obstante, la civilización que no hace preguntas, que coloca fuera de
su marco el mundo de la inquietud, del criticismo y de la búsqueda, es una
civilización paralizada, estancada e inerte”.
El imperio. Ryszard
Kapuscinski
Alicia de las Heras
Camino
Actuary. Home
Office.
María Begoña
Gosálbez Raull[2]
Actuary. Ministry
of Health, Social Services and Equality.
Daniel Hernández González[3]
Actuary.
Representative of the Instituto de Actuarios Españoles in the Social Security
Committee of the International Actuarial Association.
Abstract
The sustainability factor is a tool for which the main goal is to
contribute to the solvency of Social Security. In Spain, it has been
articulated by a Sustainability factor, based on a life expectancy
ratio, and a Pension Revaluation Index that replaces the Consumer Price Index for revaluation.
However, as outlined in this article, the alternatives chosen are not exempt
from uncertainty in their practical application nor are they the only
possibility of action.
Keywords
Sustainability factor; Pension Revaluation Index; Social Security;
Solvency and fairness; Actuarial approach.
Resumen
El factor de sostenibilidad es una
herramienta cuyo objetivo prioritario es contribuir a la solvencia de la
Seguridad Social. En España se ha articulado mediante un Factor de sostenibilidad basado en el cociente de esperanzas de
vida y un Índice de revalorización de
pensiones que sustituye en dicha revalorización al Índice de Precios al Consumo. Sin embargo, tal y como se expone en
este artículo, las alternativas escogidas no están exentas de incertidumbre en
su aplicación práctica ni son la única posibilidad de acción.
Palabras
clave
Factor de sostenibilidad; Índice de
revalorización de pensiones; Seguridad Social; Solvencia y equidad; Enfoque
actuarial.
JEL: G22, H55.
1. Introduction
One of the tools that are being used to shore up the
solvency of the social-security systems around the world is the sustainability
factor. There are multiple alternatives for its realization and they normally
link endogenous parameters with variables of adjustment, being applied to a
collective with certain intensity. In the Spanish case, the Law 23/2013 of 23
December has established a sustainability
factor based on a life expectancy ratio which is only applied to initial
retirement pensions; it uses the social-security population life tables and
will take effect in
The Spanish social-security is based on the principles
of universality, unity, solidarity and equality. Its protective action is
articulated in two modes: a contributory, financed mainly by fees attributed in
origin to employers and employees, and other non-contributory funded taxes. The
funding system is mainly the annual pay
as you go system. Following are two figures showing pension expenditure in
Spain between 2004 and 2014 and the relationship between income and
expenditures of the system during the same period. The estimates show an
increase in pension expenditure of 72.52% for the decade 2004 to 2014, while
total income has risen 48.67%, with a general deterioration in ratios comparing
income and expenses. Because the social-security income are primarily
determined by the workforce, it is important to notice that the employment global rate has decreased
from 44.49% in the last quarter of 2005 to 36.77% in the last quarter of 2013
and that the unemployment rate has
risen from 8.70% to 26.03% in the same period[4]. Furthermore, Spain is the fourth OECD country with the highest life
expectancy at birth after Japan, Switzerland and Italy[5], so the length of time in which pensions are paid is getting longer and
longer.
Figure 1. Expenditures in Social Security benefits. Millions of €
Source: Own elaboration with 2014 Social Security budget; 2013 and 2014
estimations.
Figure 2. Total income and expenses of Social Security in Spain.
2004-2014
Source: Own elaboration with 2014
Social Security budget; 2013 y 2014 estimations.
Hernández González, D. (2011) and (2013) has described
an approach to the concept of individual
generosity through an index at time t
which compares the contributions to the social-security system on behalf of
a person and the benefits provided to that person by the system. According to
the assumptions used and the results obtained in these studies, the rate of
personal generosity for a pensioner of contributory retirement is less than 1,
i.e., in expected terms the system gives more than it receives, with
distinctions based on the typology of the pensioner and a system more
beneficial for those who have contributed by increasing amounts overtime than
for those who have contributed with a stable structure over time (even if with
a higher total amount). Overall this would be a generous system for
contributory retirement pensioners, which promotes awareness of the imbalance,
especially when its assumptions suffer any type of degradation[6].
Applying a sustainability factor in the Spanish social
security is related to a structural deficit and, if the uncertainty stems from
cyclical factors, their implementation must be questioned. There is no single
voice about this, and it is difficult to reach an accurate and fair diagnosis
about where to find the problems of the protection system. The Spanish economy
has high unemployment limiting social-security income, a situation that could
be classified as cyclical if we only consider the recent past, but also as a
structural problem if one looks at the inherent inefficiencies of our economy
and labour market in a global world in which the power of decision has been
transferred. In any case, if we assume a cyclical character, we cannot forget
that more jobs generate more social-security income and more liquidity, but
also more potential pensioners and expected payments, not only for Social
Security.
We consider that the uncertainty of the Spanish
social-security system has structural causes. Therefore, the solvency in the
long term should be the main purpose of the sustainability
factor although, in our opinion, one should not ignore the existence of
opportunistic motivations or that other measures have already been taken to
strengthen this aim (e.g. raising the legal age of retirement reform, elevating
of the number of years of contributions for a full pension, increasing of the
number of years listed on the regulatory base, etc.).
Unfortunately, the main goal is no neutral, because it
undoubtedly will create some sacrifices from the people (and not always from
those generating the imbalance). Balancing the solvency of social security
system is relatively easy, just multiplying the amount of the initial pension
by a sufficient arbitrary fraction; what is complex is to get a good solvency
level combined with sufficient coverage of needs and with fairness, avoiding
privileged groups within the system.
3. Some introductory aspects about the
sustainability factor
3.1. General definition
A sustainability factor is a tool used to shore up the
solvency of the social-security systems. An actuarial approach should be a
priority in the analysis and development of this pillar of protection as well
as an invaluable aid in the decision-making process. It permits the
incorporation of actuarial techniques and the concept of “fairness", but
it also means the search of solvency as a permanent capacity of the system to
meet its obligations. Meneu Gaya, R. et
al. (2013) have defined the sustainability factor as an "automatic
mechanism to adjust any of the parameters of the pension system to the
evolution of some exogenous variable affecting the system". In our
opinion, a sustainability factor is an adjustment tool that allows adapting a
defined parameter of the pension system to the evolution of different
socio-economic or/and demographic variables, and it is applied to benefits
linked to long term. Moreover, the concept of "exogenous variable"
can be misleading and undefined: for example, the dependency ratio could be treated as an "exogenous
variable" but it is calculated with variables from the social-security
system such as the number of contributors
and the number of pensioners.
Therefore, we prefer the concept “adjustment variable”.
Regarding to its functions and goals, the sustainability factor is used to
contribute to the sustainability of the public pension system beyond the short
term, but its application does not have to ensure that solvency itself. The
sustainability factor is not certainly a sufficient condition to achieve this
goal and it is not strictly “necessary” as a working tool: its effects are
necessary but other mechanisms could serve the same purpose, even more
efficiently. As additional objectives of the sustainability factor, Meneu Gaya,
R. et al. (2013) cite the following:
a) Improving actuarial intergenerational equity
b) The distribution of adjustments between groups
c) Smoothing the imbalances caused by the economic
cycle
but not all possible designs can achieve these goals or are easily
applicable in practice. Regarding the sustainability factor designs, there are
different variables that take part of their definition which mainly are:
a) Collective of reference and
social benefits
b) System parameters that are
affected
c) Adjustment mechanism and
adjustment variables
d) Intensity in the adjustment
In other countries the sustainability factor has used (directly
or indirectly) different mechanisms: the adjustment of the pension-point value
to the changes in the dependency ratio,
in Germany; the life expectancy ratio
in Portugal, the ratio of actuarial
annuities, in Finland; the period to reach the full pension and the
relationship between life-expectancy and the duration
of reference, in France; the pension-point value in line with inflation and
income of the system, in Romania; the increase of the pensions with other
variables, in Hungary and Estonia; and global options based on the actuarial
balance in other countries such as Canada or the United States. In any case,
the implementation of a sustainability factor demands, regardless of their
design, absolute transparency in its features, being the methodology used and
the results obtained totally available.
For analyzing the different endogenous parameters and
adjustment variables that are used to design a sustainability factor,
especially in the Spanish case, see De las Heras Camino, A.; M.B. Gosálbez
Raull and D. Hernández González (2014).
4. First steps of the sustainability factor in
The Spanish Law 27/2011 of 1 August (article 8)
explains that:
In order to
maintain proportionality between contributions to the system and the expected
benefits and ensure its sustainability, from year 2027 the basic parameters of
the system will be reviewed taking into account the differences between the
evolution of life expectancy at age
Additionally, the Spanish Council of Ministers
established a Committee of Experts to develop a report on the sustainability
factor, which has been issued on June 7, 2013. Proposed by this Committee, the
sustainability factor firstly included The
Intergenerational Equity Factor (FEI), which acts on the initial
contributory retirement pensions, and the Annual
Revaluation Factor (FRA), which operates as a pension revaluation index.
This report should be viewed positively because the Spanish model does not
normally use the opinions of technical and professional committees whose
members, work and conclusions are public but, in our opinion, the Committee has
not got a total technical support to all their conclusions and theoretical
developments.
Finally, although the Spanish social-security system
is more than a century old, the assumption of sustainability as a principle,
albeit indirectly, is quite recent, exactly from the constitutional reform of
2011. The sustainability factor could help reach the desired balance.
4.1 The Intergenerational
Equity Factor (FEI)
The Intergenerational
equity factor FEI is based on the
concept of actuarial equivalence, using life expectancy, a reference age (x=65 years old), a reference year t and a year of initial application that
would be founded between 2014 and 2019:
[1]
is fixed and the ratio
between this variable and estimated life expectancy in the year (t+s),
in which the retirement occurs, is applied to each initial contributory
retirement pension. The Committee's goal is to "equally treat people who
are going to receive benefits from the pension system for a different number of
years as a result of increases in their life expectancy”, although they believe
that this factor may also contribute to long-term balance. Ultimately, it means
the addition of a new factor to the formula for calculating initial-retirement
pension:
[2]
It depends on the period of contributions to the system and
on the relationship between the official retirement age and the real retirement
age
Contribution Base on month i
of year j
Consumer
(or Retail) Price Index. Month i
and year j
n It depends on the
kind of pension and operative law
The greatest value of the FEI is the correction of the current imbalance so now, under equal
conditions, it makes that similar contributions result in different total
benefits depending on the pensioners’ year of birth as a consequence of the
differences in the life expectancy. The actuarial approach of FEI will improve fairness in Spanish
social-security system[7]. Additionally, it may lead to think that it allows to
add value in terms of its potential impact on the solvency of the system
whenever the evolution of life expectancy continues the trend shown so far,
which would mean a lower initial pension to the beneficiary than the initial
pension calculated without applying the FEI.
However, with the dual configuration of the sustainability factor designed by
the Committee, this effect on the solvency is not as relevant (so it is
questionable that the FEI is really a
sustainability factor; see section 6.3.).
The application of the FEI presents a problem: it is only referred
to contributory retirement pensions and not to other pensions. At this
moment and applying the current legislation, there are not reasonable technical
supports for limiting its application to a single group of pensioners (who have
contributed the most to obtaining the pension), because the variations in life
expectancy affect all pension beneficiaries. This is the reason why this
measure will generate inefficiency, inequity and inequality; we propose that
the sustainability factor should be applied to all benefits that are expected
to be received for a long time, because the durations of all those pensions are
affected by differences in life expectancy. It is also necessary to apply the
sustainability factor using mortality tables adapted for each kind of benefit.
Moreover, the Committee of Experts proposes an only
fixed reference age t, something that
does not fit the reality of the benefit system and generate inefficiencies in
its practical application. Firstly, the current system establishes different
ages to receive the retirement pension, among others: 61, 65 or 67 years, but
also in line; as described in the preceding paragraphs, for the Spanish Social
Security there are other benefits with sensitivity to the medium and long term
for which the initial age is not linked to biometric age of the beneficiary. In
those cases, it is just required to adjust the sustainability factor to the
effective initial age. We defend the determination of the reference age (x0) according to the initial
age of the pensioner (xi).
Other features of the FEI are the sensibility
to the initial age or to the mortality table that is chosen, and other critical
opinions can be seen in Hoyo Lao, A. (2014).
4.2. The annual revaluation factor (FRA)
The Annual
revaluation factor FRA is applied to all pensions using a formula based on
the application of moving averages:
[3]
Average annual variation in income. Arithmetic moving average
Average annual variation in the number of pensions. Arithmetic
moving average
Average annual variation in the average pension that is
consequence of the “replacement effect”.
Arithmetic moving average
Correction of budgetary imbalances in the system
System income, calculated as a geometric moving average
System expenditures, calculated as a geometric moving average
For the Committee of experts the main objective of the
FRA is to "ensure the balance of
Social Security over the business cycle”, being a new tool in order to
calculate the increases of the social-security pensions. That is, the Consumer (or Retail) Price Index would
not be the only variable that will be taken into account when the revaluations
of contributory social-security pensions are fixed every year.
It is very remarkable that the calculation of the FRA implies income and expenditures of
the social-security system as reference variables and its application to the
entire group of social-security pensioners affected by the revaluation of
pensions, although the definition of income and expenditure lacks specificity
and clarity regarding the real situation and it is not exempt from criticism;
for example, there are social benefits that are not pensions but expenditures
for the system. For its effects, it can be noticed that the formula contains
the realization of income and expenditures in the past, so that measures with
economic impact affecting the system will also have its consequence on the
value of the FRA. Thus, the impact of
the FEI on the expenditure will be
inversely compensated when the FRA is
calculated. Nevertheless, if there are upper and lower limits, a smaller value
in the initial pension in a given year by applying the FEI would have a positive effect on the FRA, increasing the numerator of the expression affected by and also decreasing its
denominator, and the smaller initial pension will also have an effect on the
series for the replacement effect.
The formula for the FRA has its
theoretical basis in the initial equilibrium between income and expenditures in
the year t:
where, matching expressions and applying arithmetic and geometric moving
averages:
[4]
The experts do not explain how to obtain the partial
expressions
, and do not support the use of geometric or
arithmetic moving averages. After that, the Committee of experts arbitrarily
introduces a speed correction to the ratio between income
and expenditures:
[5]
Matching [4] and [5], it must be:
and obviously it is not certain for 
. In the next step, applying logarithms and using an
approximation[8], it is possible to lead [3]. The Committee has also
proposed that the calculation of the variables and rates are based on a period
minimum of 11 years and maximum of 13 years, with past years (real values) and
future years (estimated values) relative to the central year for the
calculation, that is, 5 or 6 years prior to and after the central year t. For the experts this time period is
based on the duration of observed business cycles in Spain, nevertheless they
do not explain the methodology and sources used for that conclusion.
Furthermore, they proposed a value for the parameter alpha in the range [0.25, 0.33], but it has not been proven with a
sufficiently reasoned and adequate justification the use of these values. From
our point of view, the fact that the formulation contains estimated values is a
big risk of instability since the predictions
suppose higher politic risks. But also, the sensitivity to the differences
between estimates and reality is important enough to not consider these
estimated values in the calculation of the FRA.
An example is presented in the following table:
Table 1. Comparison of initial budget vs real values of the Social
Security
Source: Own elaboration by the Social Security Budget. Millions of
euros.
Regarding the values of the FRA and their future effect, it is important to point out that
those depend on the number of years considered in the estimation. With periods
of the past eleven years, an origin of moving averages in year t-1 and a value for alpha of 0.25%, the estimated annual revaluation factor for 2010
would have been of 0.13%, while the variation December CPI 2011-2010 stood at 2.38% (see De las Heras Camino, A.; M.B.
Gosálbez Raull and D. Hernández González, 2014).
5. The proposal of the Government of
The Law 23/2013, of 23 December, has approved the
application of a Sustainability factor
(FS) and a Revaluation pension index (IRP)
in the Spanish pension system.
5.1. The sustainability
factor (FS)
As FEI, the Sustainability factor (FS) also adjusts the intergenerational
equity only for contributory retirement pensions. The Government of Spain has
established the age of 67 as the base entry age (instead of the age of 65
proposed by the Committee) and its entry into force is planned for established
for 2019, with reviews every five years, although we have serious doubts about
its real application. According to life tables of retirement population
protected by Social Security and 
as the year-on-year variation in a five-year
period of life expectancy of 67 years old, the formula proposed for FS in the year t is:
[6]
where would have a different base every five years:
In the years corresponding to the latest year of each
five-year interval (2023, 2028 2033, etc.), FS
is equal to the FEI proposed by the
Committee of experts with the same life tables, a base year set in 2012 and
with an interval of six years of difference concerning the year of calculation,
i.e.:
In figure
Figure 3. Comparison between
sustainability factors
Source: Own
elaboration with data from the Committee of Experts, INE and Social Security.
INE data: http://www.ine.es/daco/daco42/demogra/hipotesis_12_51.xls
Social Security data: http://www.uv.es/pensiones/docs/factor-sostenibilidad/Memoria.pdf
As it can be seen, the FS presents smoother values, which imply a minor effect on the
initial pension. The FS also has a
lower incidence in terms of the promotion of early retirement and the postponed
retirement disincentives; it keeps the intergenerational equity adjustment and
the actuarial approach linked, but it does so in a way that is less intense
than the FEI. Moreover, the practical
application of the FS proposal does
not solve the problems encountered in the analysis of the FEI (a single age of entry, the application to only one collective,
etc.), which in this case requires us to maintain our previous reservations. In
terms of the variation between the alternatives, we should see the principal
reason for it; using INE demographic
projections 2012-2051 for both cases, an example of numerical results is shown
in table 2:
Table 2. Sustainability factor values depending
on life tables
|
Year |
e67 |
FEI2018,t |
FS2018,t |
FS2018,t |
|
2018 |
19,6270 |
1,0000 |
1,0000 |
1,0000 |
|
2019 |
19,7690 |
0,9928 |
0,9953 |
0,9924 |
|
2020 |
19,9103 |
0,9858 |
0,9907 |
0,9849 |
|
2021 |
20,0507 |
0,9789 |
0,9861 |
0,9775 |
|
2022 |
20,1902 |
0,9721 |
0,9815 |
0,9701 |
|
2023 |
20,3290 |
0,9655 |
0,9769 |
0,9628 |
|
2024 |
20,4669 |
0,9590 |
0,9730 |
0,9559 |
|
2025 |
20,6040 |
0,9526 |
0,9691 |
0,9492 |
|
|
INE tables |
INE tables |
S.S. tables |
INE tables |
Source: Own
elaboration with data from INE and
Social Security tables. Life expectancy using linear interpolation. Note the
difference with life expectancy from the Committee of experts’ report.
So, an important effect
is driven by the life table that is used in the estimations: if Government’s
hypothesis and Committee’s hypothesis are followed, FEI<FS, but if INE’s
life tables are chosen for both cases, FS<FEI.
In figure 4, the relationship between life expectancy at age 65 from social
security life tables and INE
projections, highlighting that total population life tables (INE) presents higher life expectancy
than life tables from a subset population.
Figure 4. Life expectancy at age 65. Social security tables and INE projections 2012-2051
Total Population Life Table
Source: Own elaboration with data
from INE and Social Security
database.
5.2. The Pension
Revaluation Index (IRP)
The Government has proposed a new annual Pension revaluation index IRP, which tries to maintain the budget
balance over the cycle with an identical formula that the one proposed by the
Committee of experts [3], but applied for the first time in 2014; its value
must be in the interval [0.25%, Variation
of Consumer Price Index in
December of year t + 0.50%]. The IRP is based on the application of
moving averages to eleven values, past and future data merge, with =0.25 for the first five years.
An improvement of IRP
versus FRA is the more concrete and
adjusted definition in terms of expenditures and income which should be
computed in the index, being the establishment of the above limits, which are
not symmetrical about the value that acts as a pivot, the variation of the Consumer
Price Index (CPI) a novelty. The existence of an upper limit that exceeds
the parameter of revaluation applied until 2013, CPI, allows the IRP to
have less problems when its constitutionality is questioned but, from the
technical point of view, the value of the maximum and minimum limits has not
been justified at any time, being therefore arbitrary; a fairer alternative is
to use symmetric limits: 
with, for example: 
. In any case, if the
estimations exposed in Hoyo Lao, A. (2014) are accepted and the effect of the
rest of reforms of Law 27/2011 of 1 August, with respect to contributory
retirement, is considered it might pose a greater limit than that currently
proposed one or, at least, raise the upper limit with a certain intensity up to
year
Establishing maximum and minimum limits in IRP allows greater relevance of the
participation in solvency of the sustainability factor, FS. Not all the intensity of the FS can now be included in the revaluation index, giving rise to
consequences that will not be fully compensated. Other considerations about the
limits of the IRP and its
consequences can be found at Devesa Carpio, J.E. et al. (2013).
Finally, the Government’s proposal includes the value of
, parameter of corrective speed
of the imbalance between revenue and expenditures, indicating that it will be
in the interval [0.25 - 0.33] and its
initial value will be 0.25, while past and future moving averages are also used
for a period of 11 years. The same criticism that was made about the FRA, needs to be made for these two
values. The revaluation of contributory pensions in 2014 has been 0.25% - while
the index value that supports it has not been published so far-. Furthermore,
it is foreseeable that the value of the IRP
continues decreasing in the long term, limiting revaluations in the coming
years because of the lower limit that will be applied, which will influence not
only the containment of expenditure but also the ability of saving and
consumption of the pensioners.
6. Lights and shadows of the sustainability
factor (FS and IRP)
6.1. The conceptual system modification
An interesting question would be whether the existing
model of the Spanish social security and its main characteristics are changed
with the implementation of the FS
& IRP. With such an application
there is no change in the financing system, which is still a pay as you go system, although it could
imply a little change in the benefit system, which partially assumes a trait
defined contribution schemes. But in this regard we must make reference to what
the technique of the revaluation has been until now: the application of a tool
that is based on the same principles of the capitalization of defined-contribution
given its multiplicative and cumulative nature.
On the other hand, the actuarial equivalence is
already used in the system with the calculation of the “capital cost”, and also
collective criteria are applied to individual pensions such as the minimum and
maximum limits of pensions or own revaluation. In addition, the value of the
pension has not relied on or depends entirely on contributions, so from this
perspective, there is nothing new to what is being done before applying the
factors. In terms of life expectancy, is already considered the determination
of certain ages for retirement while the technical studies which support the
measure are also unknown. The rates of accidents at work of Social Security are
also based on a principle used in private operations: the risk assessment and
the implementation of a premium according to their risk profile based on the
activity. Whereas in the compatibility of work and pensions it also
demonstrates another feature in this respect since it lost the spirit of the
provision to cover periods in which there are no income to address theoretical
needs assimilating the model to an investment against coverage needs.
6.2. Solvency and efficiency of the system. The
guarantee of the balance
One of the arguments that both the Government of Spain
and the Committee of experts have repeated with respect to the factor of
sustainability in the broadest sense (FS
& IRP) is that it guarantees the
solvency of the system, statement that must necessarily be nuanced. Factors are
sensitive in terms of solvency, but there are limitations to it already in its
own articulation, because they focus only on a single benefit, even if it is
the most important in terms of the number of beneficiaries and cost.
Still more relevant is that where it mostly affects
the search for solvency is in the IRP,
tool that is based on global variables but which applies to only one of the
components of spending, the revaluation, so its effectiveness is limited. Thus,
unfavourable deviations in any of the variables that are part of the IRP will be taken into account, but only
applied to revaluation (according to data of Social Security, on the payroll of
December 2012 the revaluation meant approximately 25.37% of the amount of
pensions, leaving 67.57% for initial pension and 7.05% for supplements to
minimum), and future actions on the most important item of expenditure in
pensions, the initial pension, would have some effects that would not be
completely absorbed by the proposed factors. Therefore, there is no doubt that
the factors as they are conceived will positively affect the solvency of the
Spanish social-security system, but we cannot assume that they are its
guarantee by itself.
6.3. The sustainability factor: Is it really a
sustainability factor?
One of the aspects which should be noticed is the
effect caused by the combination of the two factors. Regarding the relationship
between FS and IRP (or between FEI and FRA), a lower FS means a lower initial pension; a lower initial pension means a
lower global expenditure; a lower global expenditure means a higher IRP; finally resulting into a higher IRP, a higher revaluation and a higher
expenditure (into the limits).
This is the reason why the FS would be less impacting in terms of solvency. It can be noted
that the model is recursive and a lower revaluation at time t also contributes to a higher value of IRP at time t+1, t+2,… and to a higher
revaluation at time t+1, t+2,…(into the limits) which at the same time contributes
to a lower IRP at time t+2, t+3:
As it can be seen, the estimations are really complex.
So regarding the question: is it really the so called FS a sustainability factor? Our answer
is definitely: No, it is not. FS is focused on intergenerational
fairness and IRP is focused on
sustainability; FS could strictly be
a real sustainability factor if it would act by itself, but it is not the
adopted solution.
6.4. Technical aspects: life tables, the age of
entry and the period of variation, the collective of entrance and the intensity
of the adjustment
In terms of life tables required for the calculation
of FS, there are two alternatives:
general population life tables (conducted by INE) or beneficiaries life tables (drawn up by social-security
system organizations). In our opinion, it is preferable to use beneficiary
population tables because of our defence in applying the sustainability factor
to different benefits and also to achieve biggest adjustments to the collective
of reference, provided that values and all the methodology used are public and
accessible at all times, because the application of the principle of
transparency is a priority in this respect and these tables should obviously be
prepared by social-security actuaries.
Another issue of interest is whether the age of entry x0 is set at 65 or 67 years
old. From our point of view, reinforced by the belief that the sustainability
factor must also be applied to different benefits and not only to retirement,
the age of entry should be that one which corresponds to the age at the time of
access to benefits and not a fixed age that is not coincident with the age of
the beneficiary at that moment. Since the Law 27/2011 came into force in
The application of the sustainability factor FS only to the contributory retirement
pension is obviously the easier and less compromising solution, but also the
most inefficient and unfair; for this reason, it should be interesting for the
intensity of the adjustment to incorporate all the groups of beneficiaries who
have lifelong vocation. Under this dynamic, FS
should not be applied to temporary subsidies for death and survival, death
grants, coverage of risk during pregnancy or breastfeeding, maternity and
paternity allowances or temporary incapacity. It would apply to lifelong
widowhood, permanent disability and orphanhood. Regarding the benefits for care
of children affected by cancer or other serious illnesses (article 135.quater of the social-security law), the
age limit which is marked is not the beneficiary of the provision, but the
affected by the contingency. The provision itself has a limit set at the age of
18 years and this is where the problem of application of the corresponding age
arises. The subsidy is dedicated to cover the reduction in working hours
experienced by the person in charge of the care of the child, and it should not
be financed within the contributory social-security model, so the application
of a sustainability factor to this benefit can be doubted.
There are others benefits - Permanent non-disabling
injuries or Partial permanent disability for the usual profession- that are
lump-sum compensations that are a one-time payment but that have to be studied
taking into account their relationship with Total and Permanent Disability -
these can be considered a pension or a lump-sum compensation depending on
whether the beneficiary has reached sixty years or not, so it makes the
treatment from the theoretical point of view complicate. Even if they are
one-time payment benefits, they can become term-benefits through an
actuarial-financial equivalence, because they are referred to likely permanent
consequences, therefore the application of the sustainability factor would be
advisable.
The non-contributory pensions - disability, retirement
and family benefits - have the character of care benefits and their amount and
revaluation are set in the laws of State budgets. Some of them have
lifetime vocation, but his annual determination influence other criteria as the
lack of sufficient contributions to gain access to a contributory pension which
makes the implementation of sustainability and revaluation factors less
effective because they can be "absorbed" by the decision on the
amount of the pension adopted by the legislator. This does not mean that the
sustainability factor is not related to these pensions, because if they do not
maintain a reasonable distance and
balance with the amounts of contributory pensions - in their initial
amounts and their revaluation- the direct consequence is that contributions
"will be worth" less with time and the lack of interest will increase because there is not a perception of a clear difference between being or
not a contributor which means a greater lack of solidarity and inefficiency in
the system.
6.5. Transparency, constitutionally and other
issues
Coinciding with the opinion of the majority of
Actuaries and professionals who have studied from various points of view the
sustainability factor in the broadest sense (FS & IRP), anything
that relates to the factor of sustainability must be governed by the principle
of transparency. All the arguments, tools, methodologies, estimates and values
must be at all times available to the public by accessible media and
comprehensive explanatory proceedings, something that, in practice, has
unfortunately not been performed. We know the value of the revaluation in 2014:
0.25%, the lower limit, but the value of IRP
is as unknown as the partial values and the partial formulas used in its calculation.
Curiously, from the private protection sector lots of pages about the
transparency of Social Security have been written; unfortunately, in our
opinion, not many about its own transparency, although it is true that, at the
moment, transparency is not a characteristic of the public model. Other similar additional critics have been
made by Vidal Meliá, C. (2013)[9] in the following terms:
The sustainability factor for Spain is not automatic and is only based
on life expectancy in 2027. Decisions that may have to be taken to deal with
potential situations of insolvency would therefore not be automatic and would
not be based on a full solvency or sustainability indicator (…) The Spanish
sustainability factor has no short-term effects (…) There are no predetermined
rules, only an imprecise commitment to review the parameters of the system
every 5 years (…) the designed mechanism is not transparent because it is
unclear how adjustments will be made and who will bear the costs when an
adjustment occurs.
and a question from a parliamentary group to the Government of Spain has
been sent[10] to clarify the absence of transparency in the IRP.
Moreover, the lack of constitutional specificity and
the impossibility to find a common definition of the terms "sufficiency"
and "adequate pension" have meant that, in the past, we have updated
pensions using the Consumer Price Index, not because this was a fair and
efficient solution, but because it was the only way to find a solution to the
wording given by the Spanish Constitution, and so, not for this reason any
other form of revaluation must be unconstitutional, especially when the new
formula allows the revaluation of pensions to be above the instrument used so
far, the Consumer Price Index.
Following article 50 of the Spanish Constitution, the
revaluation of pensions acts to ensure the "economic sufficiency of
elderly citizens" but one question is whether we can determine the exact
age in which citizens are considered elderly people. Furthermore, as recognized
by the Constitutional Court[11], in terms of the protection and care for the elderly "we cannot forget that the economic
resources to achieve the objectives of the legislative action are limited"
and that "affiliates to Social
Security do not have a subjective right to a certain amount of future
pensions" and that our Constitution is not obliged “to keep all and each of the initial
pensions in the planned amount or that each and every one of those already
caused have to experience an annual increase”. In summary, the revaluation
of pensions is not an acquired right, must not be strictly annual or does not
have to affect in the same way to all the collective covered, and is not
inexcusably linked to the Consumer Price Index, statements that support the
implementation of IRP. If the
sustainability factor in the broadest sense (FS & IRP) infringes
the Spanish Constitution, the same argument should also be proposed for many
other rules - Law 27/2011 for example- that have reformed the system of Social
Security through measures with a negative economic impact for the citizens.
Another feature that has to be noted in the analysis
of a sustainability factor based on life expectancy FS – regardless of Committee or Government’s proposals - is the
sensitivity of the projections used. Finally, in terms of the practical
application of the sustainability factor law, there are issues that have not
yet been explicitly solved and that are a limit for transparency:
1. Whether the group of pensioners from
retirement includes or not disability pensioners in life tables
2. The expressed formula used to calculate
the substitution effect.
3. Regarding the rate of variation of
prices up to December, calculated according to official data from the INE. How will it determine this
revaluation and its relationship to the upper limit of the IRP? Will it be really and exactly calculated at the revaluation
time? Will there be a compensation procedure in other cases?
4. Which macroeconomic variables are going
to be considered as basic to estimate revenue and expenditure? What estimation
procedure will be used by the Social Security?
7. Other designs
The debate about the sustainability factor has been
dealt with from different perspectives depending on the institutions and
professionals participating, with too many critics and too few alternative
proposals for the design. To improve transparency and knowledge of the real
situation of the Social Security, the definition and the calculation of the
actuarial balance sheet model should be incorporated into the Spanish model
independently of the application of a particular sustainability factor.
7.1. The Intergenerational equity factor
"adjusted to the age of entry to retirement”
Using the life expectancy as a variable of adjustment,
Hoyo Lao, A. (2014) has proposed an alternative intergenerational equity factor
that "fulfilling the objective to limit the longevity, adapts to different
periods -transient or full validity of the reform of 2011 - and situations
-such as the advance or delay in access to retirement- and it is also less
sensitive to the reference year chosen to link the delivery to the evolution of
life expectancy". The proposal is based on the adaptation of the
denominator of the factor of intergenerational equity using the same access to
retirement age at the time of its recognition, age i, which may be different from the age j that is linked to the t0 reference year, that is, j is fixed and i variable, thus coming up to the expression:
and values such as:
Table 3. Comparison between the FEI and the FEIa
Source: Hoyo Lao, A. (2014).
7.2. The sustainability factor and the
application of the equation of Kaan
Based on the actuarial collective equivalence
principle or equation of Kaan, Sáez de Jáuregui Sanz, L.M. (2013) has proposed
a sustainability factor that relates to initial pensions at the moment t and t+r using the following expression:
establishing a sustainability factor through ratios of life expectancies
added to the unit, which, in practice, would use a value of r = 5 to adapt to temporary requirements
established by Law 27/2011. Setting the age of departure, x, in 67 years, the reference year in 2014, and using the life
expectancy corresponding to tables of Social Security that are the basis for
the FS values of the ratio of this
alternative we obtained the following data:
Table 4. The
sustainability factor and development of equation of Kaan
|
Year |
Factor |
Year |
Factor |
|
2018 |
1,0000 |
2025 |
0,9627 |
|
2019 |
0,9961 |
2026 |
0,9599 |
|
2020 |
0,9922 |
2027 |
0,9572 |
|
2021 |
0,9885 |
2028 |
0,9546 |
|
2022 |
0,9849 |
2029 |
0,9521 |
|
2023 |
0,9814 |
2030 |
0,9497 |
|
2024 |
0,9780 |
2031 |
0,9473 |
|
2025 |
0,9747 |
2032 |
0,9451 |
|
2026 |
0,9716 |
2033 |
0,9429 |
|
2027 |
0,9685 |
2034 |
0,9407 |
|
2028 |
0,9655 |
2035 |
0,9387 |
Source: Own
elaboration with data from Social Security.
The results are not very different from those obtained
by the ratio of life expectancies, but his formula results more logical from an
actuarial point of view, which makes it a preferred option against the
application of a life expectancy ratio. In the same work and using again the
equation of Kaan, the author proposes a sustainability factor based on "an
automatically reduction of the pensions´ growth”, actual
actuarial values and the inflation c,
using the formula:
7.3. The adjustment to the age of entry and the
collective reference
Similar to the previous proposals, it is possible to
establish an alternative for the sustainability factor FS using the age of access to the benefits that allows for
adaptation to different alternatives in terms of groups depending on its
related benefits. The technical argument is based on an actuarial approach that
draws on the search for greater actuarial equity between generations and also
benefits. It is therefore the use of a ratio, with life expectancy in the
numerator and the denominator, and securing only the reference year but without
setting a reference age for everyone in the collective due to its variability.
For each benefit p would have:
or 
or 
This enables the action on different benefits in a
more suitable technical and social environment, although it is necessary to
obtain mortality tables that correspond to each group for a better fit. This
alternative also allows the adaptation of life expectancy at the age of entry
to benefits in each moment, even though there may be other approaches in the
case of postponed and anticipated retirement respect to the general retirement
age. For retirement-pensions that are different from the general retirement
age, where perceived benefits during a period other than that corresponding to
the general age, the same sustainability factor than the one for general retirement
age could be applied, which would benefit the postponed retirement and would
strengthen the conditions for early retirement, even though this is something
that can be achieved with the application of equitable and appropriate
coefficients, without making new adjustments through the sustainability factor.
7.4. The Individual
generosity index as a sustainability factor
A global alternative to work with is the concept of
"generosity of the system" and the Individual generosity index to adjust the variables (see also
section 2.). This index is a measure that reflects the relationship between
individual contributions to the system 
and expected
benefits from the system 
, relationship that, by simplicity, has been here restricted
to contributory retirement pensioners (then, are real and
known values):
Applying the individual generosity index as a
sustainability factor complies with the goal of improving the relationship
between the contribution and what is perceived, as well as promoting the
solvency of the system and incorporating the life expectancy in the stream of
benefits. It is, therefore, of great interest since it acts upon the true
contributory effort of individuals during their entire working life and it is
his/her individual history what determines any correction, being also adaptable
to benefits of a different kind. One of the possibilities of calculation is to
set a minimum percentage 
of charge on the
pension and link the generosity index with its complementary value to the unit,
allowing the model to add a greater percentage of pension the lower the
generosity of the system is to the individual, i.e. the more that the worker
has contributed in relation to what he/she expected to perceive. The use of 
limits the effect of
the index but maintains solidarity as a component in the calculation and
prevents the application of high values of discount on the initial pension. We
could also set an upper limit of the sustainability factor and/or the
individual generosity index thinking about the solvency of the system since the
index of individual generosity can be greater than 1, although this limits
equity to those who have contributed more than they expect to receive. For
example, the resulting formulation for the sustainability factor FS through a linear transformation would
be:
This design allows savings in expenditure on pension
because of the use of 
as a maximum corrective limit. From the
employees’ perspective, it would be difficult to reach this limit since in
order to obtain a contributory retirement benefit they would have had to
perform a certain number of quotes, which would always add a percentage to the
minimum limit set. Taking into account that the lower the index, the higher the
generosity, the following table is an example of the sustainability factor
based on a generosity index of 0.90 and 0.60, for different values of:
Table 5. The sustainability factor based on generosity index
Source: Own elaboration.
The lower, the value of , the more recognized contribution to the system in relation
to the expected benefits and the bigger discount on the initial pension. This
index is based on an actuarial approach that combines the application of
actuarial techniques, the impact on equity and the direction towards balance
and solvency; its application is very intuitive: the bigger the gap is between
an expected pension and what has been contributed to get it, the bigger the
correction that should be applied.
7.5. The current revenue and expenditure of the
Social Security
Using the concepts of income and expenditure of
social-security system, a sustainability factor that only takes into account
the relationship between both can be defined as a corrective and estimated measure
for the future situation. For example, the coefficient of income and actual
expenditures of each year (including relevant settings for extraordinary items)
can be used and a revaluation of pensions by a corrective factor which,
respecting the alternative proposed by the Government, uses an interval with
minimum and maximum limits can be established. Using the relationship between
income and expenses does not require long reporting periods from the past for
its calculation, although the inclusion of a greater number of them can provide
more information. This model is intuitive, simple and does not need to
incorporate future estimates, but should not be forgotten that it is based on
an indicator of liquidity and a solvency issue would require using, as more
appropriate, the actuarial balance sheet model.
8. Conclusions
The sustainability factor itself is not necessary;
what would be necessary would be its effects,
and there are other alternatives that can have the same effects. The
sustainability factor is not sufficient because it works only on one part of
the expenditures of pensions and it cannot guarantee sustainability only by
itself, although it would be positive for it. In our opinion, it does not
change the principles of the model, neither the financing, while many of its
criticized characteristics are already used in the system. Furthermore, FS should be applied to all long time
benefits and the real age of entry in the system should also be used. IRP has been designed with excessive
arbitrariness and should not depend on future estimations.
We believe that the sustainability factor is
constitutional and we defend its spirit and theoretical basis, but not its
practical application, which does not have the sufficient and necessary
transparency. There are other alternatives, for example actuarial annuities,
and it is possible to use the individual generosity index as an adjustment
variable in order to improve the relationship between amounts paid to the
system and from it, to improve the sustainability and to include the life
expectancy in the model. In any case, the actuarial balance sheet model for
Spanish social-security system must be calculated and implemented as a standard
practice because it is an essential tool in decision making and knowledge of
the Social Security.
Fecha de
recepción del artículo: 25 de marzo de
2014
Fecha de aceptación definitiva: 21 de mayo de 2014
References
[1] Bosch Príncep, M.; D. Vilalta de
Miguel; I. Morillo López y O. Roch Casellas (2013): ”Revalorización de las
pensiones españolas del 2012 y 2013: una aplicación implícita del factor de
sostenibilidad”. Economía Española y
Protección Social, nº 5. Asociación de Actuarios, Estadísticos y
Economistas de la Seguridad Social. Pág. 97-113.
http://www.aaeess.es/descargas/revistas/EEYPS_5_articulo_04-MANUELABOSCH.pdf
[2] De las Heras Camino, A.; M.B.
Gosálbez Raull y D. Hernández González (2014): Enfoque actuarial para la implantación del factor de sostenibilidad en
el sistema público de pensiones en España: nuevos retos para los sistemas
complementarios. Fundación Mapfre. Ayudas a la investigación 2012.
[3] De las Heras Camino, A.; M.B.
Gosálbez Raull y D. Hernández González (2014): “El factor de sostenibilidad en
la Seguridad Social. Una visión actuarial”. Gerencia
de Riesgos y Seguros, nº 118. Fundación Mapfre. Págs. 28-35.
http://www.mapfre.com/fundacion/html/revistas/gerencia/n118/es/estudio2.html
[4] De las Heras Camino, A. (2013):
”El Factor de Sostenibilidad en la Seguridad Social española. Un análisis de la
propuesta del Comité de expertos y la decisión adoptada por el Gobierno”. Revista CEF (Trabajo y Seguridad Social)
en abierto.
www.laboral-social.com/factor-sostenibilidad-seguridad-social-espanola-analisis-critico.html
[5] De las Heras Camino, A. (2011):
“El Factor de Sostenibilidad y el diseño de los actuales Sistemas Públicos de
Pensiones”. Revista de la Red de Expertos
Iberoamericanos en Seguridad Social, vol. 9. Págs. 10-13.
http://www.oiss.org/IMG/pdf/N9_Revista_digital_de_la_REI_en_SS.pdf
[6] Devesa Carpio, J.E.; M. Devesa
Carpio; R. Meneu Gaya; A. Nagore García; I. Domínguez Fabián; B. Encinas
Goenechea (2013): Observatorio sobre el
factor de sostenibilidad.
http://www.uv.es/pensiones/Factor-de-sostenibilidad.html
[7] Hernández González, D. (2013):
“La generosidad como herramienta de información individual de los sistemas de
seguridad social”. Anales del Instituto
de Actuarios Españoles. Noviembre. Págs. 177-198.
http://www.actuarios.org/espa/web-nueva/publicaciones/anales/2013/177-198.pdf
[8] Hernández González, D. (2011):
“La prestación contributiva de jubilación en la Seguridad Social. La
generosidad del sistema y su reforma en base a la transformación de las fuentes
de financiación”. Ubicumque sint. In
Memoriam. Gregorio González Gómez y Juan Andrés González González. III
Congreso Ibérico de Actuarios. Congreso Internacional, Madrid, Junio.
[9] Hoyo Lao, A. (2014): “El factor
de sostenibilidad del sistema público de pensiones y su entrada en vigor: el
factor de equidad intergeneracional ajustado a la edad de acceso a la
jubilación”. Economía Española y
Protección Social, nº 6. Asociación de Actuarios, Estadísticos y Economistas
de
[10] Meneu Gaya, R; J.E. Devesa
Carpio; M. Devesa Carpio; I. Domínguez Fabián; A. Nagore García y B. Encinas
Goenechea (2013): “El factor de sostenibilidad: diseños alternativos y
valoración financiero-actuarial de sus efectos sobre los parámetros del
sistema”. Economía Española y Protección
Social, nº 5, Asociación de Actuarios, Estadísticos y Economistas de la
Seguridad Social. Págs. 63-96.
http://www.aaeess.es/descargas/revistas/EEYPS_5_articulo_03-ROBERTMENEU.pdf
[11] Sáez de Jáuregui Sanz, L.M.
(2013): “Dos modelos de sostenibilidad en el sistema de reparto de las
pensiones de jubilación de prestación definida”. Economía Española y Protección Social, nº 5. Asociación de
Actuarios, Estadísticos y Economistas de la Seguridad Social. Págs. 263-322.
http://www.aaeess.es/descargas/revistas/EEYPS_5_articulo_09-LUISSAEZDEJAUREGUI.pdf
[12] Varios autores (2013): Informe del Comité de Expertos sobre el
factor de sostenibilidad del sistema público de pensiones y votos
particulares emitidos al respecto. 7 de Junio.
[*] Todos los enlaces están operativos a 15 de mayo de 2014
