Are Spain’s Pensions Sustainable?
An opinion peace originally published in Spain’s El Pais.
The problem occurs because we know that the current system will hardly have surpluses in the future. The government has presented its proposal regarding the Sustainability Factor. It is based on the report of the Group of experts they have met in June. The proposal has two key elements. The first is what that group – that I was part of – called the Factor of Intergenerational Equity. Its aim is equal treatment for people who retire at the same age and with the same job history but belong to generations with a different life expectancy. This factor, similar to that of other countries with the same environment as ours, has not generated much controversy. It seems reasonable that a worker with higher life expectancy, in order to receive the same total amount in pensions during his retirement period, should receive a little less each year.
The second factor, the one that determines the annual update, is the one that is generating controversy. The initial proposal, although very complex in its formulation, consists in setting a budget constraint that would basically ensure that throughout an economic cycle the revenue of the system must be sufficient in order to finance pensions.
It is in the hands of the Parliament to decide what rule of revaluation will apply for its pensioners, and the only thing that is needed is to make sure that there are enough resources to finance it. I believe nobody can be against this. A pay-as-you-go pension system cannot deliver what it does not have.
The rule chosen by the Government ensures that, even if revenues are not sufficient to finance the expenses, pensions must increase with at least 0.25%. The problem arises because we know that the current system will hardly have surpluses in the future. Once the economic crisis is overcome, we will begin to suffer the consequences of aging when the masses with the highest life expectancy retire. That is to say that if nothing is done, we are condemning pensioners to a quasi-freezing of 0.25% of their pension with the consequent loss of purchasing power. We know that a long period of freezing of pensions would bring the long-awaited budget balance. But does this makes any sense ?
This solution does not seem very reasonable, it would condemn the retiree to reduce their consumption when it is likely that, with age, health worsens and more care and attention may be required. Sustainability must be achieved by reform. With measures containing expenditure, for instance taking into consideration the entire working life for the computation of pension, or delaying the age of retirement. Or by taking measures that increase revenue. In order to achieve this, it would not be a good idea to increase contributions. Other taxes could be used, such as VAT or alternatively the widow’s pensions should be financed from the Budget just as the minimum complements are.
In short, the proposal of the Government can be useful in order to introduce transparency and establish clear rules. But the sustainability of pensions cannot be left in the hands of a budgetary constraint compliance, as it will lead to a gradual and unjust loss of the purchasing power of our pensioners.
José Ignacio Conde-Ruiz is Deputy Director of Fedea and Professor at the Complutense University.