Is the pension system sustainable, how should social security change to cope with an ageing population, can we trust the state to continue paying pensions, and is it a good idea to depend on the decision of the government of the day? Professor of Political Economy, Jesús Huerta de Soto, answers these questions in the documentary series ‘Neither justice nor social’.

At 11Onze, our aim is to bring economic knowledge closer to the population so that everyone is aware of what is happening and can think about what to do. This Tuesday, we recommend a production that Value School has recently released. It is the documentary series ‘Ni justicia ni social’, directed by Jesús Huerta de Soto, Professor of Political Economy at the Universidad Rey Juan Carlos de Madrid.

Dependence on the State

The public pension system was created by Otto von Bismarck, the father of modern Germany and the first chancellor. In 1889, he founded the first pension system in history. And he did it for political reasons. At the time, he needed to halt the advance of socialism and, with this measure, he won the favour of the workers. Bismarck then had a very clear long-term goal: to make citizens dependent on the state.

This political measure was successful and spread throughout the world. In 1935, US President Franklin Delano Roosevelt (the father of the New Deal) created modern Social Security. He advocated a pay-as-you-go pension system, not a funded system. What is the difference? The funded system means that each worker sets aside a nominal portion of his or her salary and gets it back when he or she retires. Like a public pension plan: you generate your pension.

The pay-as-you-go system, on the other hand, is based on current workers paying for current pensions. In other words, the state has an inflow and outflow of money. In 1935, this was not a problem because in the United States there were 52 workers for every pensioner. Today, however, the European and American average is two workers for every pensioner. And so the system is collapsing. Even more so when you consider that pensions are higher than workers’ salaries. This means that maintaining the current pension system means destroying savings and, therefore, the economic capacity of workers.

But the pay-as-you-go pension system has the issue that it creates dependency on the part of workers when they retire. Savings have been destroyed because they do not have the capacity to save and because, moreover, they rely on the state to pay them a pension. Currently, 70% of Spanish retirees depend on their pensions. So what is to be done?

Recovering the model of the Second Republic

In Spain, before the coup d’état that led to the Civil War and the dictatorship, there was already what was called the ‘Régimen de capitalización en el retiro obrero’. That is, a system of nominal capitalisation for workers. Franco opted for the pay-as-you-go system and did so, obviously, by spending the money accumulated by the capitalisation system. This made him very popular, but he had just mortgaged the future of pensions.

In this episode of ‘Ni justicia, ni social’, Huerta de Soto advocates a return to the funded pension system. And he finds a way to prevent the change from one system to another from having a direct impact on public debt. An economic sleight of hand that depends exclusively on changing the financial system. Again, private banking is in the middle of the problem, but with courageous politicians it could also be halfway to the solution.

Episode 1 of ‘Ni justicia, ni social. Las pensiones’.

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