Pensions In Spain: Taxes Put Up With Whatever Is Thrown At Them

For some months now, social security contributions have been insufficient to pay for pensions, and it doesn’t look like the recovery in the economic cycle will correct the problem. Faced with a problem of these dimensions, the political parties have come up with various alternatives. These range from financing widows and orphans’ allowances from current tax revenues, to creating a new tax exclusively for financing the Social Security or trusting that the economy’s future growth will sort out the situation.

In 2014, the Public Administration deficit was 5.7% of GDP, which complied with the objective agreed with Brussels. That said, there were appreciable deviations in both the deficits of the Social Security and the autonomous regions, which were offset by improved results from the State and the town halls.  In 2015, when the deficit target was 4.2% of GDP, the same situation was repeated by levels of the public administration.

Although the electoral campaign has not yet begun, the parties are making their move and the socialist party (PSOE) has already let slip that if they win the elections they will create a tax specifically to defray the costs of pensions. They have also announced they will not cut taxes or touch personal income tax, but will raise estate tax, corporate tax, wealth and environmental tax.

For their part, Podemos-IU have come up with a strange proposal, consisting in the elimination of tax breaks for individual complementary welfare, such as in the case of private pension plans, which shows the “mess” these parties are in. Nearly 10 million people annually contribute to pension plans, paying an average amount of 1,400 euros per year.

After recording a surplus for many years (2000-2009), the Social Security account recorded a deficit of 1.1% of GDP in 2014. For 2015, the target was to cut this to 0.7% of GDP, but it ended up at 1.3%, and this could reach 1.6% in 2016.

Since 2010, the Social Security deficit has been caused by the fall in employment due to the economic crisis (a drop in social security payments). At the same time, the increase in expenditure was hit by continued inertia as a result of demographic trends. Another contributing factor is the revaluation of pensions and the fact that new ones tend to be higher than those which are no longer included in the system.

This whole issue was tackled in 2012, with a pension reform which progressively extends the pension age. It includes a new formula for revaluating pensions and introduces a sustainability factor in the calculation of new pensions. However, these measures will be applied progressively and their impact will be felt in the medium term.

In the short term, the Social Security imbalances have been partially financed by the Reserve Fund which was created during the surplus years. Since 2012, over 45 billion euros have been used, leaving the fund with a little over 35 billion. This is obviously just a temporary situation.

For the time being, and despite the economic recovery, the deviation in the Social Security deficit has not been corrected. In 2015, social security contributions have risen 0.8% annually, below the rise in the number of affiliates (3.4%) and in the cost of pensions (3.5% overall, and 4% in the case of retirement pensions.)

This disappointing reality is basically the result of two problems which are difficult to solve.

The first one is related to the cost of job creation policies, in light of the decision to directly cut contributions without any compensation for the Social Security (in 2015, it will lose out on 1.615 billion euros and in 2016, 2.1 billion).

The second issue has to do with the kind of jobs created, which is fuelling an increase in the average social security contribution bases which is lower than the growth in the number of affiliates. This reflects the fact that salaries are lower in the new contracts.

An greater increase in contributions compared to expenses would be needed to close the gap of the last few years. To comply with the 2015 budget, the increase should be 10%, although in the 2016 budget proposal the government has assumed a 6.7% rise in social security contributions, based on end-2015 which seems optimistic.

About the Author

Carlos Díaz Guell
Editor at consensodelmercado.com and innovaspain.com, Carlos began his career in financial journalism as founding member of El País. He's been communications director of Bank of Spain, member of the ECC at the European Central Bank, Institutional Relations director at Iberia and editor at La Economía 16 magazine.