The 'single payment' incentive for delaying retirement in Spain loses almost half of its actuarial value

The aging of the population and the pressure on the sustainability of the public pension system led the Government of Pedro Sánchez to approve an ambitious reform under which lies a clear yet complex objective: increasingly delaying the effective retirement age. And it did so through two means: penalizing the early retirement of workers and rewarding those who choose to continue working beyond the legal age. However, one of the formulas chosen to encourage delaying retirement has a catch, since, for different reasons, retirees end up giving up a significant part of their future pension.

This is what is known as a "single payment". A lump-sum check offered by Social Security to those who retire after the legal age. Voluntarily, retirees can also opt for a permanent increase in their monthly pension for life (an additional 4%) or opt for a combination of both formulas. The truth is that the interest in collecting the money at once has grown significantly, since if in 2023 18.5% of late retirees opted for the single or mixed payment method, in 2024 the percentage increased to 24%, with more than 21% choosing only to collect the check.

What compensates more? The reality is that the premium for delaying retirement is reduced by half if it is collected in a single payment instead of month by month. There is, therefore, no actuarial neutrality, a concept that implies that the money that Social Security delivers at once should have exactly the same updated financial value as the set of monthly pension payments that the worker renounces during the remaining years of his life.

This is concluded by a report prepared by Fedea that evaluates 280 representative profiles combining different pension levels, sexes, retirement ages, delayed years and contribution careers, using mortality tables differentiated by income level. The fundamental conclusion is clear: the legal formula of the single payment is not actuarially neutral in any of the profiles analyzed. That is, all workers who opt for the check instead of the lifetime increase in the pension suffer a financial penalty.

Specifically, the study determines that the single payment represents, on average, only 51.2% of the actuarial value of the life pension transferred. This means that, in strictly financial and actuarial terms, the average worker who chooses the lump sum money loses approximately 48.8% of the economic value of his incentive compared to collecting the 4% monthly increase. In other words: opting for the check means giving up practically half of the value of the pension that you would receive throughout your retirement.

Greater gap in women and high pensions

For the authors of the study, these results raise "a relevant distributional question", since the gap is wider for women because their greater longevity increases the expected value of a supplement collected throughout life, while the legal single payment does not incorporate that difference. Furthermore, it increases with the level of pension: the capital formula grows less than proportionally, while the permanent supplement maintains a more direct relationship with the pension. So two people with the same delay can receive single payments that represent very different proportions, depending on their sex, expected longevity and the amount of their pension.

Even in the most favorable scenario proposed by the authors, the lump sum money received in a single payment at the time of withdrawal is still less than the value of the lifetime supplement. All in all, the report concludes that retirees who choose to cash the check are not necessarily making a bad decision. In fact, capital can be attractive "to meet immediate needs, repay debt, invest, leave an inheritable amount or reduce exposure to future changes in pension rules," Fedea explains.