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Javier Díaz-Giménez, Professor, IESE, University of Navarra

Two quick thoughts on pensions

Wed, 24 Feb 2010 08:54:23 +0000 Published in El Economista (Madrid)

The Spanish pension system is a pay-as-you-go system with defined benefits. Pay-as-you-go means that the contributions paid by today's workers are "distributed" among today's retirees. In exchange, today's workers are promised that the contributions paid by the workers of the future, when we retire, will be "distributed" to us.

Defined benefit means that the amount of pensions is calculated according to a formula that does not take into account the amount of contributions. In recent years -including 2009- Social Security has collected more than it has distributed.

Therefore, paying pensions today is not a problem. But it will be in the future. Depending on how Social Security affiliations evolve, perhaps as early as 2010. And if not, in 2011, 2012 or 2013. That is why we must decide as soon as possible how we are going to reform pensions.