The pension crisis in simple terms

The Social Security Fund's troubled retirement fund finances have been in the news again. Specifically, the program known as the Exclusive Defined Benefit System (Sistema Exclusivo de Beneficio Definido, SEBD) is doing badly. This is reflected in a growing decline in its reserves, the result of long years of receiving fewer contributions than the obligations it has to honor with those who are retiring.

I am under the impression that, although many very enlightened financiers have explained the problem, many people, because of the technical language and because it is a complicated subject, do not understand it in all its magnitude. I will try here to give a simple example to shed light on a gray subject.

The pension program of the fund, like any other pension program, consists of the contributors contributing their contributions, which are placed in savings and investment instruments, all of which at the end of the productive life of each contributor, has allowed accumulating a sum that allows receiving, for the years he/she lives, a decent pension. Let me make a comparison. It is like a person spending many years of his life making a payment to acquire a house of a certain design and value within a certain period of time. 

So far so good. But if the pension program or, equally, the "term house" program is not well designed and well executed, we are in serious trouble. If when designing and executing the plan for the houses, it turns out that each one will cost more than what we projected, or if we agree with the client a lower bill than what the house would cost, we will have a "deficit" or "financial gap" because we are obliged to deliver a house that is worth more than what we were paid. 

The pension program is similar. If at the end of life the contributor is going to take away more than he put in, either because he put in less than he should have, or for less time than he should have, or because he lived in retirement for more years than the fund had calculated, there will also be a "deficit". Just as each buyer gets a more expensive house than he paid for, each retiree gets a pension for which he did not pay.