Older people and longevity in Spain and Portugal: basic demographic indicators to be taken into account in state pension policies
The change in the demographic structure in Spain and Portugal will have clear effects on the design and sustainability of their welfare states. The high concentration of population in older age groups, and the increasing longevity observed and expected for older people, brings to the table the debate on what should be the best design of welfare policies, with a clear focus on pensions, health, social services and long-term care. In addition to all this, a cultural change is taking place in advanced societies, with the empowerment of the elderly and the implementation of preventive policies that may slow down the acceleration of expenditure, becoming increasingly important. Measuring the economic and social effects of population ageing is currently one of the main lines of statistical- actuarial research, in which the concept of life expectancy and the incorporation of other biometric functions into the calculation plays a key role.
The implementation of preventive and functional support policies that favour active and healthy ageing and autonomy of the elderly is becoming increasingly important in developed economies.
The demographic change that is taking place, and its effects on the population pyramid, make it necessary to design actions to accompany a greater longevity of people from 65 years of healthy life states.
The quality of life and well-being of our elderly people must be guaranteed, promoting in an increasingly proactive way actions that increase the possibility of developing their lives independently, all supported by strong welfare states, with consolidated welfare benefits (health, pensions, dependency). The dynamics of family composition in Spain and Portugal also influences this change in behaviour. Both countries, traditionally characterised by informal care for the elderly, mainly provided by the family, have long faced persistent low fertility rates (Ayuso and Holzmann, 2014; Ayuso, Bravo and Holzmann, 2015a, 2015b ; United Nations, 2019; Eurostat, 2020). All this accompanied by a progressive, now strong, incorporation of women into the labour market (Ayuso and Chuliá, 2018; Garrido, Chuliá and Ayuso, 2020), so that the ageing of the population appears associated with a change in the traditional way of caring for our elderly, with an increasingly notable burden of formal care. The sustainable and sufficient financing of the needs of our elderly over time, therefore, assumes its maximum significance and, in this process, the measurement of the time the elderly are expected to live after retirement becomes a priority in the project of public and private welfare policies.
The projected demographic evolution for Spain and Portugal is summarised in Figures 1 to 3, where we present the expected composition by age intervals (projected age pyramids), the expected evolution of the median age and the old-age dependency ratio of the active and passive population for the two countries, as well as the respective confidence intervals for the forecasts made.
Figure 1: Age pyramids of the population and their forecast intervals, Spain and Portugal, 2060
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Source: Own elaboration
Spain and Portugal show in their population structure a clear evolution towards the design of inverted or regressive pyramids. We refer to a situation where, without significant changes in birth and migration policies, a high percentage of the population will be concentrated at ages 65 and over, with a significant ageing of society. The projection of the average age for the population of both countries only helps to confirm this result. Calculated as the age at which the same percentage of people are concentrated on the left and right (50% younger; 50% older), Figure 2 indicates the expected increase in the figure, significantly in Spain and even more so in Portugal. As we can see, in the next decade the average age is expected to reach and even exceed 50 years in both countries, a figure clearly revealing of ageing societies.
Figure 2: Mean projected age values using functional time series models and respective forecast ranges, Spain and Portugal
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Source: Own elaboration
The consequence can also be seen in indicators such as the dependency ratio (OADR), which indicates the percentage of people aged 65 and over (currently the passive population) in relation to the working-age population (active population), represented in Figure 3, 1.21 for Portugal, in 2060), which undoubtedly raises the debate not only on the sustainability and sufficiency of pension systems in both countries, but also on the expenditure needs in other areas such as health and dependency (long-term care).
Figure 3. Projected dependency ratio values - OADR - for 65 years or more using functional time series models and respective forecast ranges, Spain and Portugal
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Source: Own elaboration
The concentration of the Spanish and Portuguese population at 65 and over should also be accompanied by an increase in the expected number of years of life at advanced ages. This is what we usually call increased longevity
And it reflects the fact that a population systematically exceeds its estimated life expectancy. Life expectancy for Spain and Portugal has only increased in recent years, and it is expected that this behaviour in general will not change significantly during the coming decades3.
In Figures 4 and 5 we present the results obtained from the projection of life expectancy at birth and at age 65, using two alternative calculation methodologies to estimate what we call period life expectancy and cohort life expectancy.
Figure 4. Life expectancy at birth (period and cohort) in Spain and Portugal
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Source: Ayuso, Bravo y Holzmann (2020)
Figure 5: Life expectancy at age 65 (period and cohort) in Spain and Portugal
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Source: Ayuso, Bravo y Holzmann (2020)
As can be seen in figures 4 and 5, the increase in the expected number of life years is being and will be significant in both countries, for both sexes, and under the use of both methodologies, although the results recently obtained from work with cohorts (Ayuso, Bravo and Holzmann, 2020) reveal the underestimation that can occur when using life expectancies in the assessment of expected expenditures on pensions, health, dependency and other associated benefits4. The difference between period and cohort life expectancy for both countries, at birth and at age 65, and their estimated evolution, appears in tables 1 and 2, respectively.
Table 1. Life expectancy Period and cohort at birth and expected interval, by sex
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Source: Spain (life expectancy period - Instituto Nacional de Estatística INE; Cohort life expectancy - authors' estimates); Portugal (life expectancy period - Instituto Nacional de Estatística INE; Cohort life expectancy - authors' estimates); ė (difference between Cohort life expectancy and the life expectancy period). Note: All figures expressed in years.
Table 2. Life Expectancy Period and Cohort at 65 years of age and expected interval, by sex
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Source: Spain (life expectancy period - National Institute of Statistics INE; Cohort life expectancy - authors' estimates); Portugal (life expectancy period - National Institute of Statistics INE; Cohort life expectancy - authors' estimates); ė (difference between Cohort life expectancy and the life expectancy period). Note: All figures expressed in years.
As shown in table 2, life expectancy for Spanish men at age 65 will rise from 18.4 years in 2010 to 24.2 years in 2060; and for Spanish women, life expectancy at age 65 will rise from 22.6 years in 2010 to 28.9 years in 2060. In the case of Portugal, life expectancy for men aged 65 will rise from 17.2 years in 2010 to 23.3 years in 2060; for women from 20.9 years in 2010 to 27.3 years in 2060. When these figures are calculated using cohort methodologies, we observe an estimated underestimation when using life expectancy at age 65 of approximately 1.7 years for men (both in Spain and Portugal), and 2 years for women (also in both countries).
Thus, in any case, a significant number of expected life years after the age of 65 (which may be even longer than those normally used in expenditure estimates) is revealed, revealing a clear increase in longevity, typical of countries with strong health systems, and which make decisions and the calculation of pensions, health and dependency needs to be made taking into account their appropriate combination with the significant increase in the population at advanced ages that we have commented on in the previous paragraphs.
Decision-making and the calculation of pension, health and safety needs
And what are the most important implications that we want to highlight in relation to our pension systems, taking into account a larger number of elderly people and a longer life expectancy for them? Only in summary mode do we want to highlight:
1. impact on state pension systems
Both Spain and Portugal have public pay-as-you-go pension systems with defined benefits, which means that the pensions of the retired population are paid annually on the basis of contributions made by the population working in that period. Dependency rates - OADRA - tending towards one, i.e. situations in which there is practically no distance between the number of contributors for each retired person, may call into question the sustainability and sufficiency of the systems if structural reforms are not carried out to cover expected expenditures through alternative pension projects, such as defined contribution distribution systems. In any case, it seems logical to include the expected behaviour in life expectancy in the estimation of pension expenditure, which in Portugal has already been done by incorporating the sustainability factor into the old age pension calculation and automatically indexing the retirement age to life expectancy at 65, but which in Spain is currently postponed or indefinite.
Dependency rates with a tendency to one, i.e. situations where there is hardly any difference between the number of taxpayers for each pensioner, may jeopardise the sustainability and adequacy of systems
2. Impact on health aspects
The ageing of a population also affects a country's health policies, mainly because of the needs that may arise in terms of the development of certain pathologies or diseases associated with old age. The chronic nature of certain diseases undoubtedly takes on a significant weight, making it essential to calculate life expectancy by state of health and type of disease. These indicators may also become relevant if the objective is the proper management of resources. The combination of life expectancy with health management indicators (such as the number of medical visits or the necessary expenditure on certain medicines) takes on special significance, especially given the high number of people expected to be affected.
Combining life expectancy with health management indicators (such as the number of medical visits or the necessary expenditure on certain medicines) takes on special significance
3. Impact on social and health areas
The need for social and health care is increasing in ageing societies. This refers to the care that people may need as a result of long periods of convalescence due to illness or other accidental causes (such as falls at home) that are increasing in the older population. Again, social and health management requires indicators that reflect how long people may be in certain situations, and the needs for help in each. Changes in family structures, with fewer children, and the greater need for formal help, have a significant impact on predictions in this area, where the development of preventive policies (to curb, for example, accidents among the elderly) and to strengthen their autonomy are becoming increasingly important. There are social programmes aimed at increasing the well-being of individuals in their own homes, for example, through the functional adaptation of housing or the provision of support products, programmes that are increasingly being implemented in advanced societies.
Social and health management requires indicators that reflect how long people can be in certain situations, and the needs for help in each
4. Impact on dependency systems
The prevalence rates of dependency - long-term care for basic activities of daily living - increase with the age of individuals. Public dependency coverage again requires estimates of people who are expected to acquire different levels of dependency and the associated support needs. In countries like Spain, public aid has been directed mainly to the most severe levels of need, and to a lesser extent to moderate levels, but in any case the high concentration of people in older age groups makes estimation of spending needs in this area a priority. Again, changes in family structures have a firsthand effect in this context, for many years clearly associated with the provision of care by families (women as the predominant caring sex; children caring for parents) and now heavily affected by changing social and cultural structures. The analysis of the sustainability and sufficiency of public care systems in the medium and long term is therefore as important as that analysed above in other areas, such as pensions. Objective indicators of dependency and of the ability to perform certain activities of daily life are essential for a better understanding of the health risks faced by older people, for defining policies to prevent and mitigate risks, and for determining appropriate public and private (social) policies.
5. Impacto nas projeções de poupança a longo prazo
Objective indicators of dependency and the ability to carry out certain activities in daily life are essential for a better understanding of the health risks to older people
The impact on people's financing needs due to longer life expectancy and the fact that societies will face significant changes in population structures in the coming years that require high budgetary needs at the level of state expenditure has highlighted the relevance that long-term savings should have on households in Spain and Portugal. The financial education of people in both countries should come to the fore when they themselves can make estimates and forecasts about the monetary needs they may have in the future, with financial and insurance innovation being key when it comes to designing products that fit the profile of each individual. In countries such as Spain and Portugal, traditionally characterised by high rates of home ownership, the design of products that allow for the liquidity of real estate in old age and can finance, if necessary, the expenses resulting from ageing, not covered by public systems, may now occupy a fundamental place (Bravo, Ayuso and Holzmann, 2019). In the same way, from the point of view of pensions, the strengthening of the 2nd pillar, i.e. occupational retirement plans, should gain more weight in our systems, as a complement to first pillar public pensions that should always be guaranteed.
People's financial education must become relevant when it comes to making estimates and forecasts of their future monetary needs
1Chair of Actuarial Statistics, University of Barcelona (Department of Econometrics, Statistics and Applied Economics), Riskcenter-UB); mayuso@ub.edu
2Professor of Economics and Finance, Universidade Nova de Lisboa NOVA IMS & MagIC & CEFAGE-UE & Université Paris-Dauphine PSL; jbravo@novaims.unl.pt
3Pending to quantify the expected effect of the recent Covid-19 health crisis on life expectancy, with a greater impact in Spain than in Portugal. However, the effect that the pandemic may have on this biometric indicator is likely to slow down when working with medium and long term projection horizons
4It should be remembered that life expectancies are those normally used by countries to assess the coverage provided by the various pension systems
References
1. Ayuso, M., Holzmann, R. (2014). Condicionantes demográficos, estructuras de población y sistemas de pensiones. Documentos de trabajo Instituto BBVA de Pensiones, 5, 1-12.
2. Ayuso, M., Bravo J. M., Holzmann, R. (2020). Getting life expectancy estimates right for pension policy: period versus cohort approach. Journal of Pension Economics and Finance, 1–20. https://doi.org/10.1017/S1474747220000050.
3. Ayuso, M., Bravo, J. M., Holzmann, R. (2015a). Answers from demographic policy to the aging of the population: family, labor market and migration. Instituto BBVA de Pensiones Working papers, 14, 1-20 (also in Spanish version).
4. Ayuso, M., Bravo, J. M., Holzmann, R. (2015b). Revisiting the projection assumptions concerning demographic drivers of the international organization, national institutes and academic documentation. Instituto BBVA de Pensiones Working papers, 10, 1-34 (also in Spanish version).
5. Ayuso, M., Chuliá, E. (2018). ¿Hacia la progresiva reducción de la brecha de género en las pensiones contributivas? Documentos de Trabajo Instituto BBVA de Pensiones, 22, 1- 24.
6. Bravo, J. M., Ayuso, M., Holzmann, R. (2019). Making Use of Home Equity: The Potential of Housing Wealth to Enhance Retirement Security. IZA Discussion Papers Series n.12656, Institute of Labor Economics, Bonn (Germany).
7. Eurostat (2020). Fertility Statistics. Eurostat Statistics Explained, https://ec.europa.eu/eurostat/statistics-explained/index.php?oldid=4078…
8. Garrido, L., Chuliá, E., Ayuso, M. (2020). En la etapa final de la vida laboral: la ocupación de los españoles mayores. En El envejecimiento como riesgo empresarial, Wolters Kluwer (en prensa).
9. United Nations, Department of Economic and Social Affairs, Population Division (2019). World Population Prospects 2019: Highlights (ST/ESA/SER.A/423).
Pregunta
Respuestas de los expertos
El concepto de estado de bienestar es bastante ambiguo; incluso los distintos países lo interpretan de forma diferente, llegando a clasificarse en cuatro grupos: países mediterráneos, nórdicos, anglosajones y continentales.
España se encuentra, naturalmente, dentro del grupo de los países mediterráneos, cuyo estado de bienestar se caracteriza, por tener un modelo social con menores gastos que el resto de los grupos y que está fuertemente basado en las pensiones y en unos gastos de asistencia social muy bajos.
En general, el estado de bienestar incluye los derechos de pensiones, sanidad, educación, desempleo, servicios sociales, cultura y otros servicios públicos, donde estarían los subsidios. Esto implica que ampara al conjunto de los ciudadanos y no solo a los trabajadores.
El efecto de una esperada mayor longevidad en el futuro puede afectar de forma distinta a los diferentes derechos que componen el estado del bienestar. Veamos cómo incide en cada uno de ellos.
El efecto de una esperada mayor longevidad en el futuro puede afectar de forma distinta a los diferentes derechos que componen el estado del bienestar
a) Pensiones. El efecto de una mayor longevidad sobre las pensiones de jubilación es muy importante. En este punto, conviene recordar que casi todos los países de nuestro entorno han introducido alguna medida que ajuste el aumento de la esperanza de vida. España también lo hizo en 2013, mediante la incorporación del Factor de Sostenibilidad, que corrige la pensión inicial según el incremento de la esperanza de vida, para que se mantenga la equidad intergeneracional. Sin embargo, no se ha incorporado en el resto de las contingencias comunes (viudedad, incapacidad, orfandad, favor familiar). Considero de vital importancia que se siga aplicando el Factor de Sostenibilidad o un instrumento similar para, además de mantener la equidad, contener el crecimiento del gasto en pensiones. Incluso habría que analizar si este instrumento debiera extenderse a las otras contingencias.
b) Sanidad. Es evidente que un mayor número de años de vida van a suponer un mayor gasto en sanidad, sobre todo, sabiendo que el mayor porcentaje de gasto se concentra en las edades cercanas al fallecimiento. Otra variable que hay que vigilar es la de esperanza de vida en estado de buena salud. Es imprescindible que la parte de sanidad se dote de los recursos suficientes para poder hacer frente al mayor gasto que inevitablemente se va a producir en el futuro.
c) Educación. En este caso, el diseño de la financiación de esta partida no se ve influida por el aumento de la esperanza de vida, pero sí que debería hacerse un esfuerzo para que los resultados de nuestros alumnos fuera similar al de otros países de nuestro entorno.
d) Desempleo. No se vería muy afectado por la mayor longevidad, excepto que se retrase de forma importante la edad ordinaria de jubilación.
e) Servicios sociales. Claramente debería hacerse un esfuerzo de financiación en el futuro, porque cada vez llegará mayor número de personas con mayor número de años para poder utilizar este tipo de servicios.
f) Cultura. Aunque este derecho es utilizado por todos los grupos de edad, tal vez el hecho de que en el futuro haya más personas mayores, con más tiempo de ocio, tenga que hacer que se replantee su financiación.
g) Otros servicios públicos (subsidios). En este caso el efecto no será muy importante.
In some of the policies of the welfare state, of course, life expectancy should be a reference variable, although in others it would not make sense.
Logically, life expectancy should be a reference variable in those welfare state instruments that meet two requirements at the same time: one, they should be specified in life-type benefits; and, two, they should be of a contributory nature.
An example of this type of policy can be found in contributory pensions: retirement pensions and most widow's and permanent disability pensions. At present, because life expectancy is not taken into account, individuals of different generations who have paid the same contributions and retire at the same age generally receive different benefits throughout their lives because they have different life expectancies.
Taking into account life expectancy would be a guarantee of intergenerational equity
The individual of a more recent generation, with a generally longer life expectancy, would not gain from that of a previous generation, as in one way or another the system of calculating the benefit would take into account the different life expectancy.
It would also prevent living longer from undermining the financial sustainability of the welfare state. If, as we all wish, life expectancy increases over time, such a mechanism would help to limit the increase in expenditure.
Conversely, it would not be logical to take life expectancy into account in other types of welfare state policies such as minimum or non-contributory pensions, because they have an objective of guaranteeing a decent standard of living, which is independent of life expectancy; or, in benefits such as unemployment, health or education, which are not lifelong but linked to a situation that is temporary.
Welfare state policies are aimed at people's needs, and therefore everything that affects them needs to be taken into consideration when designing them.
Within welfare state policies we find policies related to pensions; and pension systems are based, to a greater or lesser extent, on the pay-as-you-go system. This means that the pensions of one moment are supported by the contributions of the same period. This relationship is influenced by many variables, one of which is demographics.
Failure to take account of circumstances such as life expectancy in the design of pension systems leads to their inadequacy and failure to meet their ultimate objective, which is to be solvent and secure
Demography is characterised, at the present time and foreseeably in the future, by a decrease in the birth rate and an increase in survival. The latter, although it is good news, generates, together with the reduction of births, a significant risk for the pension systems. Fewer people will pay for the system and more will need more resources (financial, welfare) for longer, as they live longer. For all these reasons, not taking these circumstances into account and excluding them from the design of the systems means that they are inadequate and fail in their final objective, which is to be solvent and guarantee coverage for the population.
This is an overly simplistic and perverse question. I will explain.
The life expectancy of a population is an average value of the time that this population will live on average. If we analyse it in more depth, the subgroups with the best living, health and working conditions are those that live the longest, while those subgroups that are helpless, without resources, in poor health or precarious are those that will live the fewest years. This is the average value.
So, to begin with, the use of a single indicator should not be valid. You need a set of indicators that measure different characteristics.
Then comes the real question: what do we want to cover?
Clearly, if there is going to be a series of social or economic transfers, life expectancy serves the institution to determine the cost of those measures and, as such, should be used, as it adjusts budgets and gives governments an idea of the resources needed to grant the transfers.
Applying a factor that takes into account life expectancy may result in the most disadvantaged and needy classes receiving less economic or social transfer
From the point of view of the benefit to be paid, again the question must be asked: what do I want to cover? and perhaps the most difficult one, to whom?
If I apply a factor that takes account of life expectancy, it may be that the most disadvantaged classes, who are most in need, receive less economic or social transfer than those who do have the means, because they have a better social position, better employment contracts or are in good health.
Depending on the interests of the parties involved (government, political parties, trade unions, etc.), the indicator can be used for whatever you want, but the consequences once the decision has been taken are clear.
The answer to this question must begin by laying the foundations of what I understand by the Welfare State (WS), as not all people, and certainly not all States, understand the same thing, nor do they have the same priorities when it comes to setting out their different policies to achieve this WS.
We will understand the Welfare State as the set of activities developed by governments in order to meet social and redistributive needs that enable individuals to achieve their life goals regardless of their race, origin or social class, and all with a public budget from the State.
Having established this first element, the second aspect would be to design such policies, and here, in addition to talking about pensions which could be the most direct idea between EB and life expectancy, we should talk about dependency, long-term care, housing, health and education, policies which will be key to establishing the EB of the 21st century.
In order to design these policies, it is necessary to establish indicators that, at the same time, allow the results obtained to be evaluated in order to redefine policies in the future (continuous cycle).
Providing long-term care, in addition to traditional home help or residential services, requires a rethinking of housing policies
Establishing life expectancy as a reference indicator should make us reflect on the implications it has. The first and immediate one is that the increase in life expectancy is an achievement of the most developed societies since their inhabitants, when they are born in that country, have the possibility of living more years, but we must look at how we live those years and with what quality of life, which affects the other policies we have pointed out previously. Living longer means that, once the retirement age has been reached, there are still years ahead of us, which directly affects pension and long-term care policy, since living longer implies higher levels of dependency, which increases in older people. Taking care of long-term care, in addition to the traditional services of home help or residences, requires a rethinking of housing policies. It is necessary to bet on alternative models to property and move to models of sharing, cohousing or reverse mortgage to improve the living conditions and means that we can have when we are older dependents. The same goes for education. We have moved on to a model of continuous training throughout life and we must continue to think about making training attractive and motivating in such a way that it allows us to continue to achieve dreams for all those of us who believe that education makes us all equal.
Por supuesto que sí, y no solo la esperanza de vida sino también la esperanza de vida saludable y atendiendo a las diferencias por edad, y recalculando dichas esperanzas de vida en diversos momentos de la vejez por cuanto no es lo mismo, por ejemplo, la esperanza de vida a los 60 años que a los 75 y eso también debe tenerse en cuenta en el momento de elaborar las políticas del estado de bienestar. El alargamiento de la esperanza de vida a los 75, por ejemplo, conllevará necesidades futuras en el ámbito doméstico, ajustando las infraestructuras de los hogares a esas necesidades de la gente mayor, las cuáles redundaran en una mejora de la salud al reducir los riesgos de accidentes y mejorar la autonomía personal.
No solo habrá que considerar como indicador la esperanza de vida sino también la esperanza de vida saludable
Any rigorous research work on pensions, health or dependency will inevitably refer, more or less extensively, to the demographic component of the population under study. And this reference, generally, will refer to the ageing of the population, represented in its maximum exponent by the increase in life expectancy during the 20th century as one of the greatest demographic achievements of human beings throughout history.
In this respect, the set of sociodemographic changes at the end of the past century and beginning of the present in the developed countries have given rise to the generation of new scenarios for economic policy in general (changes in income generation, consumption, saving and investment patterns) and for social and health policies in particular (where resources are obtained and what their uses will be), which are particularly complex and tangible in the current situation of the SARS-CoV-2 pandemic. Ageing and longevity are driving, in areas such as social and health policy - and their necessary intersection, the social and health care system - together with pensions, the specific design of strict actions within the specific protection systems of the States. Specifically, the trinomial of ageing, health and dependence entails an inexorable increase in both the absolute and relative prevalence of demographic dependence and morbidity. Its most immediate consequence refers to the significant impact on the public expenditure of states (where resources are scarce), which in turn has a direct and indirect effect on the population's pockets. Directly, because the beneficiaries of public benefits (whether monetary or services) often require specific ad hoc financial contributions through co-payments; and indirectly, because public income comes from the public treasury financed by individuals.
Therefore, life expectancy plays a transcendental and irreplaceable role in the design of any Welfare State policy, from different prisms. For example, the ageing of the current population (20% of the population in Spain is over 65 years old, and 20% of this segment is over 85 years old; and where more than 12,000 people are over 100 years old) reveals the need to pose new challenges in terms of care for the specific group of older people, such as long-term care. This care goes beyond the traditional social or health intervention (increase of public expenditure around 1% GDP).
Another example of this involvement is the necessary modification of the balance of intergenerational balances in terms of rights, obligations, responsibilities and contributions. In the end, who benefits from what and at the expense of whom adopts rigorous drifts in the broad life cycle of people: not only in the biological, but also in the demographic and economic-financial one, which takes on an essential role both for individuals (how they optimally distribute their financial resources throughout their life cycle (and that of their ascendants/descendants) and for the legislator (balance in the resource-employment binomial). A third inescapable prism of involvement refers to the design of families: the structure, composition and characteristics of today's family are modified by the new times that are occurring, as a consequence, among others, of the increase in life expectancy, and which establishes certain implications that condition the design of welfare policies by the legislator.
People's life expectancy is postulated as a powerful indicator for the design of Welfare State policies
In conclusion, people's life expectancy is postulated as a powerful indicator for the design of Welfare State policies, the achievement of which in the increase of years lived should not imply reticence in the design of policies, and whose impact on the financing of the same should not generate a climate of discussion beyond what is strictly reasonable and necessary.
The financing of most public pension systems, including the Spanish one, is based on the pay-as-you-go system in which the contributions of active workers are used to finance the pensions that exist at the moment, which is known as the principle of intergenerational solidarity. The decline in the birth rate and the increase in life expectancy point to an increase in the dependency ratio, defined as the ratio of the population over 65 years of age to the active population, which raises concerns about the financial sustainability of pay-as-you-go pension systems.
In Spain, life expectancy at 65 years of age in 1975 was 15, while it currently stands at 21.5. This means that the pension will be paid for more years. In countries such as Finland and Portugal the amount of the initial pension is already linked to changes in life expectancy. Similarly, in countries that use national accounts in their public pension systems, such as Sweden, Italy, Poland, Latvia or Norway, the calculation of pensions depends mainly on the individual amounts contributed and the life expectancy of the worker at the time of retirement.
Taking life expectancy into account in the design of pension systems will limit the growth of pension expenditure and thus, in the long run, this measure contributes to an improvement in the financial sustainability of pension systems. However, it is important to stress that even in this case, sustainability will not be guaranteed. In order to ensure financial sustainability, other types of automatic financial adjustment mechanisms should be applied. Such mechanisms would be defined as a set of pre-determined measures to be applied immediately when an indicator relating to the financial health of the system so requires. Countries such as Sweden, Japan or Canada have legislation on such mechanisms.
Another important issue if life expectancy is taken into account in the calculation of pensions would be the intra-generational redistribution that takes place. The use of average life expectancy between men and women would result in a transfer from men who live on average fewer years to women. On the other hand, people with a higher socio-economic status and higher wages live, on average, more years. The majority in this group are men, so the net effect of using average life expectancy would be unclear and would need further study in the field of public pensions.
Linking life expectancy to public pensions is necessary but not sufficient to ensure the long-term sustainability of the system
In conclusion, linking life expectancy to pensions is necessary but not sufficient to ensure the long-term sustainability of the system. Further measures - automatic financial adjustment mechanisms - are therefore inevitable. A thorough analysis of the redistribution that occurs when any type of measure is adopted in the public pension system should also be carried out as the effect may not be as desired initially.
Life expectancy indicates the expected number of years a person will live at a given age, i.e. the life expectancy of that person at that particular age. It is a measure that can be very useful when, for the purpose at hand, a single measure summarising that expectation is sufficient.
However, on other occasions other "detailed" measures are necessary, such as, for example, the probability of survival of the subject - active, disabled or dependent worker - in each of the future periods (years, semesters, quarters, bimonths, months).
This is the case with any policy that requires the precise estimation of the expected future periodic costs that it will involve in the long term, such as, for example, any public pension, both contributory and non-contributory, or a minimum income or minimum living income scheme, or a dependency benefit scheme, among others.
Therefore, as an actuary, I am not in favour of the generalised use of life expectancy, as it is only a summary measure of other variables that may be more relevant and useful, and, if used in the previous cases, it produces the fiction that the period over which the measure or policy is applied coincides with that measure - as if it were a certain period of time, as well as that all future costs are of the same amount - there will be no revaluation of pensions, for example - and have the same value at the time they are estimated, thus implying a "fat brush" treatment leading to an under- or overestimation of expected costs.
Widespread use of life expectancy as an indicator may lead to an underestimation or overestimation of expected costs
That is why, for example, in the case of contributory public retirement pensions, I am against the sustainability factor that was introduced with Law 23/2013, the application of which has been suspended, as there are more precise ways from an actuarial point of view of helping the sustainability of the social security pension system by ensuring that the amount of the pension is in a more balanced relationship with the probability of the pensioner being alive at each of the future pension maturities.
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