Social security strained by crisis

Rajoy government may have to look to pension reserve fund to make up shortfall

For the last decade, Spain's Social Security system has been steadily growing, its surplus increasing annually. But like other European countries, Spain is currently facing a demographic as well as an ageing-population problem, leading to significant deficits in its pension system. Now, four years into an economic crisis that has seen unemployment exceed 20 percent, it is teetering on the edge of deficit.

"We are going to end the year in a tight spot. Up until August, we could see that the numbers were falling, but things were still reasonable. But since September, there has been a sharp drop in contributions, precisely at a time when there should have been an improvement," says Octavio Granado, outgoing Secretary of State for Social Security.

In 1999, the Social Security system was no longer required to contribute toward the funding of the national health service. At that time, pension payments were half their current level, while contributions from employees and businesses were rising in tandem with the economic boom.

But higher pension costs, and most notably a sharp increase in unemployment payments, have had a major impact. The government says that the maximum number of people able to receive unemployment benefit at current levels is 17 million. In November, that figure rose to 17.25 million; in December, it will rise yet further.

The first signs of trouble appeared last year. The Social Security system registered a surplus equivalent to 0.2 percent of GDP, but this was largely a result of a 67-billion-euro pension reserve fund, which was set up in 2000. Without the pension reserve fund, the system would have gone into the red last year.

If the system does go into the red, the temptation will be to draw on the pension reserve fund, which is sufficient to meet 10 months of pension payments. This would, however, require a change in the law.

The current situation has parallels with 1996, when the Popular Party came to power and blamed the Socialist Party for having to borrow money to pay pensions. Octavio Granado dismisses such comparisons.

"The problem then was that there was no money, and the Social Security paid attributable costs to the state that were never transferred because they didn't do the math properly," says Granado.

The Popular Party has yet to outline what action it will take regarding the pension fund. For the moment, the law says that the reserve fund can only be used to address "structural deficits" within the system and that the amount used mustn't surpass 3 percent of contributions.

In other words, the pension fund cannot be used to balance the books in the long term. Furthermore, the rules define a structural deficit as having had to be running for at least 18 months, ruling out the pension fund's use for the coming year.

Granado is categorical in this regard: "The fund is for demographic contingencies, not for solving cyclical situations."

One solution would be for the Social Security to cease financing costs that are not directly related to it, for example, pension top-ups, or the amount paid on top of minimal pensions to bring recipients' incomes in line with the minimum wage. This could be covered, for example, by an increase in taxes.

In 2010, Spain approved pension reform that pushed back the legal retirement age to 67 years from 65, while extending the length for contributions to 37 years in total. The new legal retirement age will be implemented from 2013, and will increase progressively over the years.

Spanish workers will also have to work for at least 37 years to get 100 percent of their pension benefit and will be entitled to early retirement only when they are aged 63. The law on the pension system does allow people with disabilities to retire in advance with a minimum of 25 years of contributions.

Earlier this year it emerged that the total portfolio invested in Spanish government bonds by the pension fund rose from below 50 percent in 2007 to 90 percent by the end of this year.

A line of unemployed people waits outside a Madrid employment office.
A line of unemployed people waits outside a Madrid employment office.SAMUEL SÁNCHEZ
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