Is the pension system sustainable? How would social security have to 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 decisions of the incumbent government? Professor of Political Economy Jesús Huerta de Soto answers these questions in the documentary series ‘Ni justicia ni social’ (Neither justice nor social justice).

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 needs to be done. 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 Rey Juan Carlos University in Madrid.

Dependence on the state

The public pension system was created by Otto von Bismarck, the father of modern Germany and its 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 stop 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 own pension.

The pay-as-you-go system, on the other hand, relies on current workers to pay for current pensions. In other words, the state has an inflow and an 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, therefore, the system is collapsing. Even more so if we take into account that pensions are higher than workers’ salaries. This means that maintaining the current pension system equals destroying savings and, therefore, the economic capacity of workers.

However, the pay-as-you-go pension system has the issue that it creates a dependency on the part of workers when they retire. The notion of saving disappears, because they do not have the capacity to save and because, in addition, they rely on the state to pay them a pension. Today, 70% of Spanish retirees depend on their pension. So what needs 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 known as 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 chapter 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 the other 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.

Chapter 1 of “Neither social nor justice”. Pensions.

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