Balancing the Spanish public pension scheme

The Spanish pension expenditure runs currently at roughly 10% GDP. A huge liability laying a heavy burden on public finances. Ageing population is rapidly shifting the ratio between beneficiaries and those at work, while the crisis adds in the its further stress by dramatically shrinking the number of employed workers. Social Security is heading for increased deficits in the absence of tough measures.

The Spanish government has tabled a middle-of-the-road proposal aimed at curtailing automatic inflation-linked benefits upgrading. A complex formula has been devised delivering a minimum 0.25% increase in underperforming growth periods. Time will tell us if such stiff conditions are enforced in election years, government preserving itself the ability to go beyond that threshold. Retirement age will be gradually delayed but its prolonged implementation schedule will bring about no sizeable effect in the short and medium term. Trimming down indemnities by taking into account a markedly longer working life reference period, will undoubtedly prove more effective.

All in all, this reform will not prevent Social Security deficits from emerging. It will provide some extra room in avoiding untenable pressures that might jeopardise the current drive for budgetary balance. Yet, the underlying objective to square the public pension scheme seems wholly unrealistic in a long time perspective. Sooner or later the general budget will have to increasingly address the Social Security shortcomings. As hopes that massive job creation might fill the gap prove wholly delusive, the attempt to tackle deficit from a purely accounting point of view largely amounts to a self-defeating exercise.

All highly developed mutual insurance schemes, like the one enforced in France, show how their beams are unable to face the pressure of ageing population. Covering expenditure through general budget resources or resorting to public debt becomes an unavoidable option. Stiffly reducing benefits when so many voters are involved amounts to political suicide. Markedly rising payments to the Social Security can only thwart the chances more people get to work.

Little attention has been paid to the perverse impact on jobs exerted by the current payroll-based pension financing. Most people tend to disregard this effect, wrongly believing the bill falls entirely on enterprises. As labour cost are directly hit, job demand accordingly suffers. Income taxes also inhibit labour offer, but in times where unemployment runs so high their influence on job creation seems largely more subdued. Thus, even supposing that workers are the only ones to foot pensions, switching away from Social Security payments to taxes may prove a better option.

Penalising human resources when labour market shows such a dismal record stands as the worst policy for delivering jobs and growth. While balancing the Social Security expenditure has the merit to stand as an excellent excuse for trimming benefits, any government enshrining this objective as a golden rule misses the point.

About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.

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