Current And Future Spanish Pensions Are Sustainable

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Carlos Bravo | To be able to maintain our current pensions model in 2050, when the large majority of the baby-boom generation will reach retirement age, we will need to raise pension spending to around 15% of GDP. This is a significant challenge, but one which is perfectly doable. The challenges of the system are two-fold: guarantee its financial sustainability and ensure there are sufficient funds available.

The first of these challenges is short-term, as a result of the economic crisis, unemployment and the phenomena of wage devaluation and job insecurity associated with the 2012 labour reform, and the model of economic recovery we are experiencing. This means we have had to deal with a financial deficit in the system since 2011; in 2016 it represented 1.6% of GDP and will foreseeably still remain intense for several years. Furthermore, there will be the successive gradual effects of the first group of the baby-boom generation reaching pension age.

This will require a substantial increase in the resources needed to finance the system, which will keep growing in line with the demographic trend until, finally, it begins to taper off from the 2060s. That said, maintaining standards of (pension) protection which are comparable with that in neighbouring countries not only requires achieving financial equilibrium in the system, but also ensuring an adequate relationship between the pension a person receives when he/she retires and the salary they no longer receive (the replacement rate).

The reform implemented in 2013 regarding the trend in life expectancy and the revaluation of pensions seeks to ensure the financial equilibrium of the system, taking action automatically and exclusively on the amounts of the pensions. If the effects of this reform are not corrected, the pension system will see the level of coverage its payments offer substantially reduced in future decades. The European Commission estimates that the replacement rate (pension/last salary payment) will go from 79% in 2013 to 48.6% in 2060. Recently, the AIReF (Autoridad Independiente de Responsabilidad Fiscal) confirmed the forecasts which we in CCOO made some time ago. So to be specific, if no measures are taken, over the next few years, the revaluation of pensions will be just 0.25%, contrasting with a scenario of rising inflation. AIReF itself estimates that this situation will mean a loss of purchasing power of some 7% just in the first few years of applying the formula included in the 2013 reform. Although we at CCOO calculate this forecast could lead to an accumulated deterioration of around 25% during the average life expectancy period, 20 years, of a pensioner.

Undoubtedly the source for guaranteeing a good pensions system is related to creating more good quality jobs. In order to do that, productivity needs to be improved, moving towards a growth model based on innovation. But while all the above is being firmed up, the immediate priority then needs to be the implementation of measures to achieve financial equilibrium in the system.

So the key is to guarantee a flow of additional stable funding which is sustainable and sufficient. On the one hand, this could come from using the margins on social contributions which there is still room for parametric reforms. And on the other, implementing fiscal measures. For example 1) increasing the maximum base rate for contributions; 2) increasing the minimum base rate, linking it to the progressive trend in the minimum wage up to 60% of average net salary, in line with what is contained in the European Social Letter; 3) converting the reductions, ‘flat rates’, etc into bonuses; 4) the state taking on the Social Security’s administrative costs; 5) raising the contributions rates; 6) bringing the average contribution base rates in the general sytem and those for self-employed in line; 7) financing widows and orphans pensions via taxes, without that implying any change in the legal framework for these payments; and 8)other structural measures like fighting fraud and the black economy.

These measures would lead to an increase in revenues which would far exceed the five points of GDP which different official organisations propose as the additional financing required by the system to ensure its sustainability in 2050.