Safeguarding pensions

The reform of the public pension systems is one of the structural changes that the Spanish economy needs to address, in order to ensure the viability of the system over the next 50 years. Unlike other major reforms of potentially sharp immediate impact on the economy, the effects of pension reform will be felt only over the medium and long term. It is none the less urgent, given that it will be effective only if the legal changes begin to be implemented gradually, starting now. The government is becoming aware that a structural change in pensions is inevitable, owing to demographic pressure and the deterioration of the labor market. Or at least this can be deduced from the Cabinet’s refusal to compensate pensioners for the loss of purchasing power in 2012 owing to inflation.

The problem is a deep-seated one, and has been discussed intensely in the last five years. The present system is unviable, due to an increasingly aging population and the rise in life expectancy; and this problem is accentuated by the deep depression in the labor market. Within a term of about 10 years, the input from a decreasing number of employed people will be insufficient to offset payments to a growing number of pensioners.

The Zapatero governments delicately tiptoed over the increasingly evident need for an in-depth reform of the system, and the Rajoy administration seems inclined to repeat the error. The political argument that stands in the way is that a change of this nature would have a very high cost in votes. It is obvious, too, that the delay in requesting a bailout is due to other reasons apart from the fear that one of the conditions imposed by Brussels and Frankfurt would be, precisely, a cutback in pensions. But the sheer force of circumstances demands that a start be made on this reform, whether Brussels insists on it or not. The lines of action required in pension reform are well defined. The government that takes on the job will have a road map perfectly delineated by a broad consensus among economists, labor market experts and politicians experienced in public administration: increase the number of years of employment required to accede to 100 percent of the applicable pension; calculate the latter on the whole of working life; bring forward to 2015 or 2016 (from some time after 2020, as planned by the previous government) the norm that defers the retirement age to 67; and break with the pegging of pensions to the CPI.

The job facing a government sensitive to the problem, with most of a legislature ahead of it, ought to be that of correctly pacing these general lines of action, so that they will not be an unbearable burden on new pensioners or those receiving smaller pensions, while relieving the burden on the public treasury. Some decisions can be put off (though not to the point of leaving them until 2022) and others can be phased in. But what is indispensable is that the public understands clearly what the general direction is; and, of course, that the implementation be negotiated with the unions and other social agents. What is certainly not recommendable is that government go on raising pensions without explaining the consequences, and in disregard of the risk of a breakdown of the system portended by the inexorable increase in structural expenditure due to demographic and job-market trends. In this ambit, too, the government is jeopardizing its credibility in the eyes of the public, the EU and the investors.