Sustainability of the welfare state

Explain how the Spanish pay-as-you-go pension system works: who pays today's pensions, and who will pay yours? How does it differ from a fully funded individual pension scheme?

What are social security contributions and who pays them (one part by the employer and one by the worker, deducted from the payslip)? Explain what that money funds and why it appears as one more deduction on the payslip alongside income tax.

Define the dependency ratio (the ratio between elderly people and the working-age population) and explain what happens to the pension system when the population ages.

The figure shows the population pyramid of an imaginary highly aged country, with the population of each age group (in millions of inhabitants), males on the left and females on the right.

1. a) Describe the shape of the pyramid: what do its narrow base and wide top indicate?
2. b) Explain what problem this structure poses for pensions in twenty years' time.

What is the birth rate and how does it relate to pensions twenty-five years from now? Explain the chain: fewer babies today, fewer contributors tomorrow, the same or more pensioners.

Life expectancy in Spain is over $83$ years and keeps rising. Explain how that affects the pension system: if retirement is around $65$, how many years is the pension collected on average and what does that mean for the system's accounts?

What is the "pension piggy bank" (the Social Security reserve fund)? Explain what it was created for (saving in surplus years for deficit years) and what happens when it runs out: where does the missing money come from then?

What is early retirement? Explain the dilemma it poses for the system (fewer years contributing and more years drawing a pension) and why it usually carries penalties on the pension. In which cases can it be fair (hard jobs, long contribution careers)?

In a country, there are two contributors for every pensioner, and the average pension is $1.200\ \text{€}$ per month.

1. a) Calculate how much each contributor should pay per month solely for pensions (excluding healthcare and other expenses).
2. b) What happens to that amount if the ratio drops to $1,5$ contributors per pensioner? Recalculate and comment.

In a country, the average pension is $1.300\ \text{€}$ a month and there are $3$ contributors for every pensioner.

1. a) Calculate how much each contributor must pay per month just to cover pensions.
2. b) If the ratio falls to $2$ contributors per pensioner, recalculate the necessary contribution and comment on what the result shows about the demographic pressure on the system.

A fictitious country has $10$ million pensioners with an average pension of $1.200\ \text{€}$ a month, and the average contribution earmarked for pensions per worker is $400\ \text{€}$ a month.

1. a) Calculate how many contributing workers are needed per pensioner to balance just the pensions.
2. b) If the real ratio is $2,3$ workers per pensioner, quantify the system's monthly shortfall and rank the levers for closing it (raising contributions, holding back the real pension, using general taxes, delaying retirement), assessing the social cost of each one.

Present three options to ensure future pensions (raising the retirement age, increasing contributions, encouraging complementary private pension plans) and analyse one social advantage and one disadvantage of each.

Private pension plans allow people to save for retirement with tax advantages.

1. a) Explain what they are and how they differ from the public pay-as-you-go system.
2. b) Reason why they are not a complete solution for low incomes (what saving capacity do they have? who do the tax advantages "pay off" most for?).
3. c) What role can they play as a complement to the public system? Propose how to encourage them fairly.

A televised debate concludes with the following statement: "The pay-as-you-go public pension system is a Ponzi scheme doomed to bankruptcy; the fairest and safest approach is for each worker to save in their own private fully funded pension plan in financial markets."

1. a) Imagine that the economy enters a ten-year cycle of high inflation ($6,5\ \%$ annually) and stock market crashes due to international financial crises. Compare and predict how this economic situation would affect a retiree under individual funding versus one under a public pay-as-you-go system. Justify what risks each system bears in the face of inflation and market fluctuations.
2. b) Analyze distributive equity: what lack of protection would workers with persistently precarious wages or with career interruptions due to unpaid family care face in a purely fully funded system? Justify why the pay-as-you-go system mitigates these individual risks.
3. c) Design a mixed proposal (multi-pillar system) that combines pay-as-you-go and funding, justifying what weight you would give to each pillar to balance intergenerational solidarity and financial returns.