Gradual reform of pensions

On Monday the reform of the Spanish public pension system was the object of an intense crossfire of proposals. The Organization for Economic Cooperation and Development (OECD) released a full report on Spain, in which it suggests a radical reform. It proposes that the age of retirement be extended in function of the life expectancy of the population, which would amount to setting it progressively beyond the age of 67, and of enlarging the time period of contribution necessary to obtain a full pension.

Meanwhile, Labor Minister Valeriano Gómez explained the more gradual reform that the government proposes: extend the retirement age to 67, and gradually increase the time period for pension computation from the last 15 years worked to the last 20, and then to the last 25. The unions, in turn, threatened a second general strike, because the putting back of retirement age constitutes a "red line" for the labor movement.

The positions in the debate are in need of interpretation. In its report the OECD sketches a fairly probable future in which all public services (from water to healthcare) will be subject to payment, or even higher payment. In the case of pensions, it pictures things from the viewpoint of an insurance actuary, making the money paid out in pensions received more equal to the contributions received.

This is how things work in economic manuals, but political management has its own rules. It is not prudent to jump from the present system to one that makes retirement age variable due to increased life expectancy, without the risk of vehement public protest. If what we are trying to do is to strengthen the public pension system, it makes more sense to correct the existing system of the calculation of contributions in terms of the deficit, and then to periodically revise the general balance of the system in function of employment, contributions and population.

There is little to object to in the OECD's call for a labor market reform that would favor the creation of employment, when recovery comes. But it recommends that the government raise taxes to correct the deficit (pointing to VAT and special taxes), and asks for reductions in corporate rates, and in company-paid social security contributions, to favor job creation. Tax rises are a government's last card when all others have failed. If, according to the OECD itself, in 2010 and 2011 the deficit objectives will be fulfilled, the government will understandably prefer to wait until a tax hike is really necessary. The OECD would perhaps be surprised to know that the effective rate paid as company tax in Spain seldom exceeds 15 percent.

The Spanish labor unions' present obligation and political opportunity is to negotiate: that is to ensure, on their members' behalf, that the reforms are being made for valid reasons, and to see to it that they are carried out fairly. But they are bent on confrontational tactics. This is not what the members want; they would prefer the union leaders to take a more active part in talks. It is odd to hear UGT and CCOO (the major unions) talking of a second general strike, after the meager results of the September protest.