Forget Tax Collection, Guaranteeing Spanish Pensions Means Reforming The System Itself

guaranteeing Spanish pensions means reforming the system itselfSpain maintain a pensions system based solely on obligatory social security contributions.

The Spanish Ministry of Finance rules out a new specific tax hypothecated to finance pensions. Its intention is that the deficit (which will increase if pensions are linked to the CPI) be financed by a theoretical increase in tax revenues which will result from the increase in income and corporation tax, or even by creating the hypothetical new taxes on technology and the banking sector.

However, for analysts at Bankinter, it is unlikely that there will really be an increase in tax revenues resulting from increasing existing taxes (income and corporation tax).

It is more likely that there will be a decline in economic activity which will practically neutralise the effect on tax revenues which an increase of marginal rates would have. In fact, a toughening of marginal rates of income tax is unlikely to be translated into an increase in tax revenues.

Alternatively, relying on the fiscal incomes generated by hypothetical new taxes (technology, financial transactions) to cover the growing Social Security deficit for pensions makes it dependent on highly cyclical economic activities which are unlikely, in the best of cases, to finance any more than a small part of the deficit.

As reference, in 2008 spending on pensions was around 76 billion euros, compared to 125 billion euros now, with an increase in average pensions of +31% in nominal terms in that period compared to a +8% increase in average wages and an increase of +15% in the number of pensioners.

Taking into account that the current system is based on the principle of inter-generational solidarity, which means that the entrants (those entering the labour market) pay those leaving, and that the Spanish population pyramid is beginning to invert (1.3 chidren per woman compared to the 2.2/2.3 necessary to sustain the population), “the only alternative to guarantee pensions is the modification of the system itself to base it on varios pillars (public/private; obligatory/voluntary), as the majority of developed countries has done, especially the nordic countries,” according to the firm.

In fact, among developed countries, only Italy, Portugal, Greece and Spain maintain a pensions system based solely on obligatory social security contributions. In addition, in the case of Spain, tax revenues and contributions are integrated at the accounting level in the general budget of the state, in such a way that there is no identification or direct correspondence between the origin of the incomes and their applications (in other words, there are no tax incomes with final objectives).