Reinventing Social Security: Towards a Two-Step Mixed Pension System

The literature has addressed the problem of pensions and has reached an almost unanimous conclusion that increased longevity is the main cause of the problem. However, in our opinion, longevity itself is not a problem and, therefore, should not be the cause of the problem of pensions. The real challenge for the sustainability of pension systems lies in a series of characteristic behaviours throughout the life cycle of a person that are motivated by increased longevity. The pension problem is therefore due to the lack of adaptation of pension systems to these vital behaviours and the fact of forgetting the initial purpose for which social security systems emerged: to ensure the ‘great old age’ and not properly determine the age of the ‘great old age’ and the needs associated with it. In this work, the limit between the active and passive phases of the life cycle is determined as the retirement age, which has maintained the rhythm of adaptation required by the ever-increasing longevity. Rebalancing resources and life cycle needs are also discussed, with particular attention to the economic needs from the current age of legal retirement. Given that neither the various reforms on the pay-as-you-go (PAYG) systems nor converting them to a funded system seems to solve the problem of sustainability and adequacy of pensions due to the various problems associated with each scheme, this work has been advanced and proposes the creation of a ‘deferred mixed system’. This system is divided into two pillars, one defined as an individual capitalisation insurance that would cover pension between voluntary retirement age adopted by workers until the age of that ‘great old age’, so that until this age workers will finance their own pensions with their own savings or with a contribution by their full wage salary (paid either by the employee or the employer), and another one structured as a system of public distribution with NDC, where the current workers finance the pensions of people who have passed the age of ‘great old age’ at the same time as they are accumulating actuarial rights for their state future pension.