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Funding System

Funding systems are understood to be the financial techniques used to plan the coverage of the costs of the protective action of the Social Security System. Basically, they are: capitalisation and distribution


Capitalisation techniques involve forming capital comprising the quotas or premiums plus the accumulative interest, intended to pay for future benefits. Thus designed, the capitalisation procedure has been the main financial vehicle of the social provision systems, especially while this have been kept attached to the actuarial techniques and legal scheme of private insurance. Of course the capitalisation technique has its roots in private insurance.

This technique has been explained as a private account open to every insured party, into which the contributions and their interest are paid. Nevertheless, there are numerous disadvantages of this system (monetary depreciation, long period of time, complex management administration, etc.).


The financial techniques of distribution implies the immediate or short term distribution of the contributions and general revenue of the Social Security System that, without time to be capitalised, become benefits to be received by the recipients. The distribution techniques are those that best suit a social security system, and allow the principle of financial solidarity to be expressed.

As the deficiencies of the capitalisation system are corrected, these corrections appear as advantages of the distribution system.

The current funding method of the Social Security System, if you think hard about it, is based on the idea of solidarity; solidarity that, at the same time, operates on three different axes:

  • solidarity between generations
  • solidarity of assets as to liabilities
  • solidarity among the various territories of the Nation.

Article 87 of the General Social Security Law indicates that the financial system of the Social Security System is a distribution system, in other words, that it imposes a sacrifice on young people to benefit older people; the healthy to benefit the sick; the employed to benefit the unemployed; those who are living to benefit the families of those who have passed away; those who do not have dependent family members to benefit those who do; prosperous and growing economic activities, finally, to benefit depressed sectors.

These links of solidarity between the current contributors and the receivers of benefits, are added to the no less significant links of solidarity that occur among the various territories of the Nation.

A certain territory may have a deficit, if only the contributors and pensioners that live there at a given point in time are considered. In this case, it is the contributions from residents in other territories that save the situation, forming what the Constitutional Tribunal has come to name interterritorial solidarity.

Also from the point of view of funding it must be noted that article 41 of the constitution stipulates "a public Social Security system", which in the interpretation of the Constitutional Tribunal implies "one sole unique Social Security system for all citizens that guarantees equality at the same time to all Spaniards in the exercise of their rights and duties regarding Social Security".

For this equality of Spaniards before the Social Security to be real and effective it is necessary to ensure, at least, the following:

  • That the contributions made over time, in any part of national territory, are, when the time comes, sufficient to pay the corresponding benefits, regardless of where they are claimed.
  • That the requirements for companies to register, affiliation, termination of affiliation, variations and the system of the corresponding benefits are uniforms throughout national territory.
  • That the contributions are of the same amount and are required in the same way in any part of the territory.
  • That when the time comes the recipients can claim their benefits in any part of national territory.

Achieving these goals also involves achieving other very significant aspects such as compliance with legal determinations and constitutions, required by different European Union Treaties.

Effectively, the importance of the contributions made in any territory ensures Spaniards are free to reside in any part of national territory and contributes to the free movement of workers within the European Union.

The cost identity of Social Security regardless of where the services are provided helps prevent labour market fractioning.

The significance of achieving these goals is not only evident during the working life of the workers, but extends into retirement. The Florida effect, meaning the fact that many pensioners choose to live elsewhere after retirement, would not be possible without the principle of exporting the benefits required by the EU regulations on the matter.

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