Don’t kill the Spanish pension system: it’s one of the cheapest!

EU authorities don’t have a clear message about the Spanish economy. One day they describe the country as Europe’s future locomotive and the next the compare it to Slovenia. Their only clear suggestion is that Spain should make further adjustments. In its last report, the EC asks for a new labor reform in order to make dismissal even cheaper and a pension system adjustment. The government has established an expert committee to undertake the reform of the public pension system so that, as they say, its sustainability (magic word) is guaranteed.

There is this strange unanimity about the Spanish pension system as a result of media propaganda and the verbiage of the experts. Is established as a fact of life that demographic reasons make the system as we now know it unsustainable; and to make the case experts present ratios between assets and liabilities for the coming years. These forecasts, which supporters of the reform (that is to say, supporters of budget cuts) have used since the beginning of the 1980s, have always failed. In addition, and this is crucial, this simple approach forgets a fundamental fact: productivity.

The issue is not how many are those who produce but how much is produced. One hundred workers can produce the same as one thousand if their productivity is ten times higher. Therefore those questioning the viability of public pensions make a great mistake by basing their arguments only on the ratio of the number of workers by pensioners because, even though this proportion will be reduced in the future, each worker will be producing much more. Perhaps what happened to agriculture can serve as example. Fifty years ago 30% of the Spanish active population worked in agriculture. Today, it’s just 3 percent, but that 3% produces more than the mentioned 30%. That is, one smaller number of workers can sustain a larger number of pensioners.

We need to consider the evolution of per capita income. If per capita income grows, there is no reason, no matter the population pyramid, to think that a group of citizens (pensioners) cannot continue perceiving the same income in real terms. If per capita income increases, pensions should not only be not reduced but they would have to be increased above the living costs.

The problem of the Spanish pension system should be seen in terms of distribution, not lack of resources. In the last thirty years the per capita income has doubled and hopefully in the future it will experiment a similar evolution. If so, it is absurd to say that there are no resources to pay retirement benefits, because it will all depend on what the society, and especially politicians, decide and if they want a genuine redistributive policy. Only the collapse of the economy could really jeopardize the pension system. But in this case retirees wouldn’t be the only ones who’d have problems.

The threat to the public pension system is not in life expectancy or the population pyramid but in applying an economic policy that drives the entire economy into a permanent recession. The sustainability of pensions is not different from the sustainability of the Spanish economy, which until now seemed fully guaranteed and that could only be jeopardized by the stubbornness to enter and remain in projects so contradictory and incoherent as the Monetary Union.

Another risk threatening the public pension system, as well as Social Security, is the tax systems’ evolution towards more regressive structures with lower fundraising power. The tax burden in Spain has been reduced in the past five years by six percent. The Toledo Pact, with its famous separation of sources, has resulted in the misunderstanding that Social Security is a closed and self-sufficient system separate from the state. Why health care, unemployment insurance, or highways are to be financed with taxation while pension should do so only through social security contributions? The State, with its whole income, must ensure that all workers in their old age receive a decent benefit. The obstacle is not the population pyramid or the increase in life expectancy, but in the fraud and tax reforms that make tax systems more regressive and undermine taxes revenue collecting power.

Pensions spending in Spain is also much lower than in neighboring countries. According to the latest data from Eurostat, in 2010 we allocate 10.7% of GDP, while the average of the euro zone stands at 13.4%; France, 14.4%; Italy, 15.7%; Germany, 12.8%; Austria, 14.9%. Even Portugal gives a higher percentage: 14.2. Looking at these figures, all the critics about the future demise of the public pension system seem disproportionate and devoid of sense.

Those who projected a catastrophic vision of the pension system also forecast that if reforms are not tackled, expenditure on pensions would reach in 2060 15% of GDP, which they consider absolutely unacceptable. However, there are already many countries whose current spending on pensions is close to the previous figure while their economies have experienced no cataclysm, on the contrary, they are in a much healthier situation.
On the other hand, we should go back to the increase of productivity.

In the last fifty years, productivity has grown at an annual average rate of 1.5%. Let’s suppose in the next 50 we experience a similar growth. That means that, in real terms, GDP will grow 125% throughout that time. If in 2010, GDP would have been of 100 euro, expenditure on pensions would be 10 EUR, and 90 EUR would remain for the rest of expenditures. In 2060, the GDP would be of 225 EUR, expenditure on pensions would amount to 33,75 EUR, and 191,25 EUR could remain for other expenses; that is, much more than at the present moment. All this talking in real terms, i.e. in euro at constant prices.

The committee of wise men appointed by Spanish PM has an easy task. They can consider income per capita as a sustainability factor. That is, spending in public pensions increasing at the same pace that income per capita.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.

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