Pensions and taxes: will you ever get back what you paid in?
A Spanish worker can pay €700,000 in taxes over a lifetime. How much comes back through the pension? The numbers don't add up, even for optimists.
English · Original discussion in Spanish · Published
Paying €700,000 in taxes and collecting a €2,500 pension: the math that doesn't work
A worker contributing an average of €17,500 a year to the State for 40 years (adding up income tax, social security contributions and VAT) would accumulate €700,000. The maximum average pension, however, is around €2,500 a month. Getting that money back would require living more than 23 years in retirement, but the debate isn't that simple: most taxes don't fund pensions, but public services such as healthcare, education and infrastructure.
The confusion between income tax and social security contributions
The recurring mistake is lumping together everything that comes out of your payslip. General income tax (IRPF) and VAT don't go to the pension fund: they cover current spending. Social security contributions (roughly 30% of gross salary, split between employer and employee) are what actually sustain the pay-as-you-go system. Anyone hoping to recover their income tax through their pension starts from an accounting misunderstanding. Even so, counting contributions alone, the math isn't favourable: a worker contributing on the maximum base for 35 years will receive a pension that, under current tables, returns what was paid in over some 15-18 years of retirement, provided the contribution bases haven't risen above inflation.
The system: Ponzi scheme or rainy-day fund?
"That's how Ponzi schemes are — they all seem eternal," you hear in the debate. The comparison keeps coming up: public pensions are paid from the contributions of current workers, not from an individual fund. The difference is that the State can borrow, raise taxes or push back the retirement age to keep the flow going. "If you go into debt to pay pensions, it's not that the system is broken — it's that it's broken and on top of that we'll be paying off the debt," sums up one of the sharpest comments. The Minimum Vital Income (Spain's means-tested basic benefit), some argue, "is delivering the coup de grâce" by adding more recipients who never contributed.
What about the public services received?
The unavoidable counterpoint: taxes have also funded the worker's education, the motorways they drive on, the healthcare they receive. "The salary gap you earn as an engineer compared to a shelf-stocker is thanks to what we Spaniards have paid in healthcare and education," one voice argues. Anyone who studied at a public university or benefited from a universal health system has received a transfer of wealth that doesn't show up on the pension payslip. Ignoring it skews any balance sheet.
The €700,000 hypothesis
The figure of €700,000 in total lifetime taxes appears in the thread as an example. Recovering it with a €2,500 monthly pension would take 23.3 years. With today's life expectancy, a man retiring at 65 would live on average to 83-84 — that is, barely 18-19 years. The shortfall is obvious. But the €2,500 pension is the maximum: the average is around €1,300, which stretches the payback period beyond 40 years. Impossible.
The conclusion of those who have run the numbers is that, even counting contributions only, it's hard to recover everything paid in. Add income tax and VAT, and it becomes pure fantasy. The State doesn't give money back; it redistributes it. And with less and less room to manoeuvre. For now, the only certainty is that life expectancy keeps rising while the retirement age keeps creeping up. Who will get what remains a mystery that even the most optimistic calculations can't clear up.
Related debates in the forum
A worker contributing an average of €17,500 a year to the State for 40 years (adding up income tax, social security contributions and VAT) would accumulate €700,000. The maximum average pension, however, is around €2,500 a month. Getting that money back would require living more than 23 years in retirement, but the debate isn't that simple: most taxes don't fund pensions, but public services such as healthcare, education and infrastructure.
The confusion between income tax and social security contributions
The recurring mistake is lumping together everything that comes out of your payslip. General income tax (IRPF) and VAT don't go to the pension fund: they cover current spending. Social security contributions (roughly 30% of gross salary, split between employer and employee) are what actually sustain the pay-as-you-go system. Anyone hoping to recover their income tax through their pension starts from an accounting misunderstanding. Even so, counting contributions alone, the math isn't favourable: a worker contributing on the maximum base for 35 years will receive a pension that, under current tables, returns what was paid in over some 15-18 years of retirement, provided the contribution bases haven't risen above inflation.
The system: Ponzi scheme or rainy-day fund?
"That's how Ponzi schemes are — they all seem eternal," you hear in the debate. The comparison keeps coming up: public pensions are paid from the contributions of current workers, not from an individual fund. The difference is that the State can borrow, raise taxes or push back the retirement age to keep the flow going. "If you go into debt to pay pensions, it's not that the system is broken — it's that it's broken and on top of that we'll be paying off the debt," sums up one of the sharpest comments. The Minimum Vital Income (Spain's means-tested basic benefit), some argue, "is delivering the coup de grâce" by adding more recipients who never contributed.
What about the public services received?
The unavoidable counterpoint: taxes have also funded the worker's education, the motorways they drive on, the healthcare they receive. "The salary gap you earn as an engineer compared to a shelf-stocker is thanks to what we Spaniards have paid in healthcare and education," one voice argues. Anyone who studied at a public university or benefited from a universal health system has received a transfer of wealth that doesn't show up on the pension payslip. Ignoring it skews any balance sheet.
The €700,000 hypothesis
The figure of €700,000 in total lifetime taxes appears in the thread as an example. Recovering it with a €2,500 monthly pension would take 23.3 years. With today's life expectancy, a man retiring at 65 would live on average to 83-84 — that is, barely 18-19 years. The shortfall is obvious. But the €2,500 pension is the maximum: the average is around €1,300, which stretches the payback period beyond 40 years. Impossible.
The conclusion of those who have run the numbers is that, even counting contributions only, it's hard to recover everything paid in. Add income tax and VAT, and it becomes pure fantasy. The State doesn't give money back; it redistributes it. And with less and less room to manoeuvre. For now, the only certainty is that life expectancy keeps rising while the retirement age keeps creeping up. Who will get what remains a mystery that even the most optimistic calculations can't clear up.
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Summary of a discussion on Burbuja.info - Foro de economía, actualidad y política., translated from Spanish and reviewed before publication. Read the full discussion (62 replies).
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