social security

Speeding up state pension reform

The government is considering further changes to the state retirement system The ongoing crisis and pressure from Brussels are pushing them toward making the move

Manuel V. Gómez
Experts fear the impact on the state pension system of the retirement of the baby-boom generation.
Experts fear the impact on the state pension system of the retirement of the baby-boom generation.MASSIMILIANO MINOCRI (EL PAÍS)

Less than a week had passed after the government announced that it was to increase the retirement age from 65 to 67 when a letter arrived on Prime Minister José Luis Rodríguez Zapatero's desk from the European Central Bank. The note made it clear that while the ECB would try to reduce Spain's borrowing costs on the international markets by buying Spanish government bonds, in return the Socialist Party government would have to make further spending cuts.

This was Frankfurt's attempt in 2011 to calm the financial storm that swept away any sign of recovery from Spain's own Great Depression. In reality, the letter did not impose any new changes to the retirement age. But the economic relapse, including the financial bailout, would end up becoming the catalyst for yet another major overhaul of Spain's pension system just two years after the biggest change to retirement payments in three decades - the one that put an end to the idea that most workers have had for almost a century of retiring at 65.

The latest proposals are based above all on the so-called sustainability factor: a mechanism designed to reduce spending on pensions outlined in the 2011 legislation for 2027, but in all likelihood to come in effect much sooner.

The government assigned a panel of 12 experts the task of overhauling the pensions system. They have now finished. Their proposal is a system designed to contain costs, along with pushing back the retirement age, as well as other adjustments to the previous changes.

The next move is up to the politicians and unions after the panel's report

The first would end automatic increases in pensions, instead conditioning the amount we are paid to the health of the country's accounts. The second would calculate the initial amounts paid to future retirees on the basis of their life expectancy at the time they retired. Now the time has come to negotiate these proposals with labor unions and business leaders.

"Obviously these changes need to be seen in the context of what has happened over recent years," says Javier Díaz Giménez, an economics lecturer at the IESE business school who has in-depth knowledge of the pensions system. "In short, all expectations have been surpassed. If we were concerned that in 2015 contributions from the workforce would not be enough to pay pensions, in reality, this had already happened by 2010."

There is little doubt that the seriousness of the crisis has brought forward a change to the way the pension system works that was not due to be introduced until 2027. At the same time, the crisis has also established the conditions for society to accept it. The group of experts that drew up the proposals admits as much in one of their more recent drafts: "It is precisely the quality of the current moment, a time of economic difficulty, that is ideal for presenting to society a reform that must be credible and reasonable... The sacrifice involved, on the other hand, is easier to accept in difficult times than in the middle of a boom."

Nevertheless, in the final version of the proposals, which were released on Friday, the idea of exploiting the crisis to push the changes through has been left out after EL PAÍS revealed it. The argument has instead been reduced solely to the financial and economic risks facing the pensions system in the long term.

A much-amended reform

M. V. G.

This year has seen the start of the application of the changes to the state pension system approved in 2011 by the then Socialist government. These included phasing in the retirement age to 67 from 65 years by the year 2027. The timeframe basis used to calculate the size of the pension retirees receive is also being raised from the levels of Social Security contributions they make in the last 15 years before the retirement age to the last 25 years. Of the many changes to the pensions system that the 2011 reform included, these are the only ones that have remained intact.

The now ruling conservative Popular Party (PP) abstained in the congressional vote on the reform in Congress, but voted against in the Pact of Toledo Commission, a cross-party committee on state pensions that also includes the presence of the country's main labor unions. The reason the PP at the time gave for rejecting the reform was precisely delaying the retirement age to 67. That was the first time a main opposition party has voted against a major overhaul of the pensions system.

However, since taking office the PP has toughened up the reforms. The first measure addressed the issue of lapsed contributions from workers during periods when unemployed. Later on, it introduced changes to the rules regulating early retirement. This involved delaying by two years the first legal age foreseen in 2011, of 61 in the case of redundancy, and 63 in the case of those accepting voluntary redundancy. The conditions allowing for access to temporary retirement have also been made stricter.

Now the time has come to introduce the so-called sustainability factor. This was due to be defined in 2027, and not to be introduced until 2032. Most of the experts involved in drawing up the draft reforms are in favor of introducing this as soon as possible, in 2014, 18 years ahead of schedule.

Since the recession returned in the summer of 2011, the Social Security system has lost more than 1.3 million contributors; in 2010, 2011, and 2012, it reported a growing deficit; unemployment has risen beyond 27 percent, and salaries, the source of contributions to Social Security, have fallen sharply, a process that will likely continue for many years to come.

Opponents of the overhaul say this is precisely what the Reserve Fund, which currently holds more than 63 billion euros, is for: dealing with future deficits. But if the economy continues as it has, Spain could find itself in the situation whereby, if the situation doesn't improve rapidly, that piggy bank will be used up ahead of the retirement of the baby boom generation, those born between 1958 and 1978 - after which point there was a sharp fall in the birth rate, sending the average age of Spaniards upward.

This demographic phenomenon, according to a report on ageing by the European Union last year, will raise the cost of paying pensions by 2040 to 12 percent of GDP, 2.2 points above the bill for 2010 - although to get the full picture we have to remember that it will be 1.6 points below the average for the euro zone. This will coincide with a severe slowdown in contribution forecasts of around 10 percent of GDP if nothing changes or new funding is not found. "In absolute terms, the number of pensioners will rise from the current nine million to 15 million by 2052," says the experts' report.

This avalanche of figures has encouraged supporters of reform to go beyond the measures outlined in 2011. There is nothing new in this. According to a recent article by the Social Security's actuary, Alicia de las Heras, "The periodic reiteration of positions warning that the pensions system is no longer viable has been a constant since it was set up."

Among the supporters of a deeper overhaul to the pensions system is the European Commission, which wants to raise the retirement age to 67 before 2027. The Spanish government, now in the hands of the conservative Popular Party, vehemently opposed the idea initially. Bringing the date forward would have made it politically difficult for the PP after rejecting the 2011 reforms precisely on the grounds of its opposition to delaying the retirement age.

In return, and with a financial bailout and its concomitant and obligatory conditions now on the table, the government has had to agree to bring forward the application of the sustainability factor. We still do not know exactly when, although the experts say it should be done as soon as possible. They argue that unless changes are implemented quickly to the Social Security system, it will not last until 2027, when the retirement age will be raised to 67. They also warn that the current problems are not simply a result of the financial and economic crisis.

Among those who believe that the worsening of the crisis has accelerated the pace of change and made reform more necessary than ever are a number of people who authored the previous changes. One of them is Octavio Granado, a former secretary of state for Social Security under Zapatero's Socialist Party administration. He blames the "seriousness of the crisis and our loss of competitiveness," referring to salary reductions and the accompanying fall in contributions to the Social Security system that have taken place over the last two years. Nevertheless, he calls for patience in order to analyze the impact of the effect of the changes that have been applied this year, and is not impressed by what he has read about the sustainability factor so far. In his opinion, it would make more sense to continue looking at ways to change the parameters of the system, such as methods of increasing the number of years of contributions used to calculate pensions.

Granados rejects calls for urgent reform of the pensions system based on his own demographic calculations. He says rises and falls in population and birth rates are cyclical, but that they dramatize the problem. His vision is similar to that of Santos Ruesga, a member of the panel of experts that voted against the reforms last week. Explaining his reasons for doing so in an article, he said: "There is excessive alarmism about the financial evolution of the system."

Most experts favor introducing a factor of sustainability much sooner

This view is not shared by Díaz-Giménez, needless to say. He believes that the events of the last two years have speeded up the need for changes that should already have been implemented two years ago at least. He argues that the government should take advantage of the situation to push forward even more radical alterations to the pensions system. "All we are doing here is putting a plaster on the wound," he says. He proposes copying the Swedish system implemented in the 1990s under which pensioners receive an amount based strictly on what they have put into the system. This approach has been put forward by Unespa, the body that represents Spain's insurance companies.

De las Heras is also a proponent of the Swedish model. She says that when Sweden introduced its reform, this was accompanied by "rapid growth" in the levels of assistance provided as part of welfare cover.

She also defends the need for reform of the Spanish pensions system, particularly the need for the sustainability measures: "It is necessary; otherwise we are condemned to constant revisions that our governments will have to implement."

She bases her argument on demographics, but admits that projections about what will happen between 2040 and 2050 are potentially erroneous.

For example, a 1996 study by the BBV bank (now BBVA) on the future of pensions predicted that within nine years, Spain's Social Security system would have 13 million contributors. The figure in 2005 was 17.9 million. It forecast 14 million by 2020. In 2013, with the labor market suffering its worst crisis since the 1940s, there are now 16.3 million contributors.

Aware of these errors, José Ignacio Conde-Ruiz, a member of the experts' committee, laid out three possible scenarios in a recent work; one optimistic, with unemployment at 5 percent. His conclusion is that the reforms of 2011 only resolved a third of the demographic problems that Spain faces.

Antonio Fernández Cordón, an economist and demographics expert at the CSIC Science Council, warns of the limits of such long-term forecasts: "Anybody making a long-term prediction is inevitably influenced by what is happening now, because their vision of the future is based on what they are experiencing at this moment."

Fernández Cordón says that Spain's ageing population is not necessarily a problem, and cannot be fully understood simply by looking at charts and graphs forecasting its growth in the decades to come.

"Demographic projections take on a life of their own," he says. "First they are made, and then they are compared with what we expect to happen with the economy, as though this would not influence the way populations grow and shrink. It is true that in a few years Spain will have a lot of retired people, but does this mean, therefore, that businesses will stop hiring and that nobody will replace them?"

Another example, he says, is the way that migratory flows are largely excluded from forecasts.

"The only demographic problem that the pensions system faces comes from our living longer," says Fernández Cordón, "but this can be resolved by changing the way that we distribute our national wealth." That is to say that the state could look for other sources of income to fund the Social Security system between now and 2046, when the problem should begin to ease. One source could be from taxes.

Miguel Ángel García, head of research at the CCOO labor union, and a member of the panel of experts, said on Friday following the release of the draft proposals that one way of creating a more sustainable Social Security system would be through introducing other means of financing it, for example, through taxes.

The experts have made their recommendations, which essentially mean more meager pensions. Now it is the turn of the labor unions and the politicians to put forward their arguments. The debate on pensions will continue for the coming months, but the decisions reached will have an impact that will last many years, if not decades.

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