An Estimate of Pension System Financial Returns

13 Pages Posted: 17 Nov 2020

Date Written: August 11, 2020

Abstract

This article estimates the financial return provided by the Spanish pension system for a sample of new retirees in 2017, calculated on the basis of the Muestra Continua de Vidas Laborales. The findings show an average real annual return (understood as the discount factor that equates the present value of the contributions paid over a working life with the value of the expected pension) of 3.5%, the 25th and 75th percentiles of the distribution of the estimated returns being 2.5% and 4.2%, respectively. By type of pension, the lowest returns are associated with early retirement, while late retirement produces higher returns, although these are still lower than for ordinary retirement. In terms of pension unit cost, the system would provide more than €1 of benefit for each euro of contribution for most of the individuals in the sample. The findings show that, on average, 2017 retirees receive €1.74 of pension for each euro of contribution; the 25th and 75th percentiles of the distribution are €1.25 and €2.03, respectively.

Keywords: pension system, internal rate of return, pension unit cost

JEL Classification: H55, J26

Suggested Citation

Moraga, Maria and Ramos, Roberto, An Estimate of Pension System Financial Returns (August 11, 2020). Banco de Espana Article 24/20, Available at SSRN: https://ssrn.com/abstract=3729151

Maria Moraga

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Roberto Ramos (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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