Spain’s Most Urgent Problem: Pension System About To Go Bankrupt

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There is a lot of talk at the moment about Spanish pensions. But, it would appear, not enough. At least it is by no means clear that public opinion and voters are very aware of what is about to land on top of them: that in 2017 the pension piggy bank will be empty.  And what will happen then? Well as what the pension system takes in is less than it pays out, technically it would become bankrupt. The State would find itself incapable of meeting all its commitments. That is, at least, the tough theory.

Does this mean that pensioners would stop receiving payments or would be paid less? Of course not. But that doesn’t mean we should relax and feel relieved. The feelings of imminent bankruptcy, financial inviability, economic sustainability with respect to the possibility of continuing with pension payments, as we know them now, are very pressing. So much so that it’s possible some of the measures implemented by the government within the framework of the famous Toledo Pact will end up being prejudicial for all of us, but particularly for those who are still working and have not retired.

The figures on the system’s disastrous situation are so dramatic that it’s unbelievable Rajoy’s government could have let it deteriorate to such an extent. The so-called pension piggy bank, the Reserve Fund, which once had 66 billion euros, now has 24 billion. Taking into account there is a gap between what is paid out and what comes in, this means that by the end of next year, or at the beginning of 2018, the bank will be…empty.

In any event, no-one will be suprised that the situation worsened during the crisis years. Millions of jobs were lost, and with them, an almost parallel reduction in contributions to the Social Security. Furthermore, a large part of the new jobs are precarious – temporary, part-time or free-lance – and with low salaries. This means that contributions to the system are way below expectations and the minimum required for it to be able to meet outgoings with incomings.

While this has been happening, payments have not stopped increasing. And at a diabolic rate. For example, we now have 1.1 million pensioners more than in 2006, 9.4 million compaared to 8.3 million. Given that the average pension has risen from 647 euros in 2006 to 906 euros in 2016 – those who are now retiring had much better salaries than are currently on offer in the market – pension payments have simply shot up. While the State paid out 79 billion euros in pensions in 2007, this year it will pay out 117 billion, an increase of 48%. This year’s pension deficit will be 19 billion euros.

Apart from the outlook for the next 15 or 30 years, if we focus on what’s going on at the moment, it’s clear that this can only be solved at least in the short and medium-term, by creating top quality jobs. In order for the system to become more balanced  – and maybe not even this way, given how fast new retirees enter – it would be necessary to create several millions of jobs in the next two-three years. This is something which, logically, is not on the cards.

But it is, above all, what is needed, given that Spain is still one of the countries in Europe with a lower percentage of working population. While in most European countries it’s normal for 50% of the population to be in work, in Spain it’s only 40%. This makes funding pensions an even more serious problem.

Another change which somehow needs to happen, to make the system more viable, is for Spanish companies to stop paying almost bread-line salaries and decide to become more like their European peers in this area. Another possibility which is also not on the cards. All you need to do is to take a quick look at the job websites to realise that many of the salaries offered are outrageous, even in positions and professions with a certain level. This journalist has seen how salaries of 13,000 or 15,000 euros are being offered to telecommunication engineers with five years experience and who speak English.

So the only solution will be to look for imaginative panaceas to postpone, in some way or another, the final outcome. They say this will happen in 2030 or 2040, when it seems there will be no way of maintaing a distribution system which is leaking all over the place. And the politicians, social agents and experts who are going to meet very soon – apparently this week – are going to take care of this within the framework of the Toledo Pact. Looking for solutions to balance the books.

One of the solutions which appears to have been gaining traction is to remove the non-contributive pensions from the system, namely those related to widowhood and orphans. A solution which would provide some breathing space for a period of time, at least until some of the structural problems – low employment, low salaries – are sorted out. If the do get sorted out! Contributions which would be paid directly out of taxes, included in the State budget. But with Brussels demanding that Spain cuts the deficit and saves a further 5 billion euros of public spending, this is naturally no easy task. Where were they going to get this money from?

Another possibility being studied is to allow those people who have retired to receive 100% of their pension and continue to work. This was considered a sacrilege a few years ago, but it really isn’t. At the end of the day, the retired person is not given a handout, but the payment is limited to what he/she contributed to the system. Why is he/she not going to be able to continue to work? Moral issues apart, this solution appears to be popular. The retired person in question will continue to contribute part of his/her profesional income, which will mean additional income for the System.

The problem is that, despite the claims that people have to work longer, it’s not clear that solution is popular with the vast majority of those people about to retire. And neither would it be the hoped for panacea.

Another solution which is more or less related is that of putting an end to the cap on contributions and benefits. Of course this would later lead to higher pensions but, for the time being, the Social Security’s revenues would increase.

After saying all the above, and despite the fact that no-one is defending it – we cannot rule out that in the end the members of the Toledo Pact will recalculate the criteria for getting a pension – more years, lower percentages etc – to effectively cut the average pension payments. And also that Social Security contributions will end up increasing. As businessmen don’t even want to hear about this – they say Spain is eight points higher than the European average in terms of employers’ contributions – the solution will be to raise employees’ contributions. This would clearly be a huge error at a time when we need higher household consumption to boost the economic recovery.

In the end, it seems that all the solutions have some sort of diabolic downside…A challenge which some would say is too great for our politicians. But then, who said being in government was going to be easy?

About the Author

Fernando Barciela
Fernando Barciela has been a regular collaborator for Spain's leading daily El Pais' business section since 1994. He is also a regular collaborator on foreign policy. For Grupo Consejeros he interviews the top executives of Spain's listed companies. He was a correspondent with Diario de Noticias, Portugal's leading daily newspaper, in 1987-2004. He has a degree in Business Science and Journalism from the Complutense University.