Saving the pension system

For many years politicians, economists and demographers have been nervously watching a slowly ticking economic and social time-bomb. It is set to detonate – depending on your calculations – sometime after 2025 as an aging population and shrinking workforce combine with explosive effect, undermining the financial foundations of the Spanish pension system and rupturing the welfare state.

Prime Minister José Luis Rodríguez Zapatero, who might like to imagine himself as a Hollywood action hero putting his life on the line to cut the red wire and defuse the bomb, has decided to risk his political future to reform the pension system and soften the retirement blow to today’s and tomorrow’s workers. It is a huge – and ultimately necessary – political gamble. But it could easily blow up in his face. And Zapatero, rather than resembling James Bond, may in the end come off more like fumbling British spy Johnny English, played by Rowan Atkinson, whose Mr. Bean character the prime minister is often likened to.

“It would be easier to do nothing, to not make any proposal, and let the government in power in 2020 or 2025 face the problems of the Social Security system,” Zapatero, of the centre-left Socialist Party, told a news conference. “But that is not our style of governing,” he added.

Until now, however, Zapatero, who was elected in 2004, has steered clear of addressing the prickly issue of pension reform and the equally thorny related question of overhauling the labour market. But with the Spanish economy in dire straits, unemployment near 20 percent, a ballooning budget deficit and his opinion ratings at all-time lows, he may well have decided he now has little else to lose and that Spain has no time to waste.

Following in the footsteps of other European governments facing similar demographic challenges, the Labour Ministry has unveiled plans to progressively raise the Spanish retirement age from 65 at present to 67 in 2025.

Anyone due to retire in 2013 would have to work two more months to claim their full pension allowance, four more months for those retiring in 2014, six more in 2015 and so on. The government is also planning to increase the number of years a person needs to have been paying into the Social Security system before they can claim a pension. The current minimum is 15 years, but one government document – rapidly withdrawn in the face of the public outcry it triggered – indicated that it could be increased to as much as 25 years.

In addition, the administration also wants to change the way retirees’ pensions are calculated, perhaps by taking the average salary of the person’s entire working life rather than just the final 15 years, which, given that people tend to earn more later in their careers, would all but certainly result in lower pensions. And it will seek to discourage the use of early retirement as a way to lay off workers, which has resulted in Spaniards retiring at an average age of 63.7 years – not 65 – and hence further burdening the system.

Shock and jaw

Since shocking unions and workers with the surprise announcement of the reform at the end of January, the Socialist government has noted that all the proposals are open for debate and that it will seek to build as broad a consensus as possible before taking legislation to Congress. But it has also stressed that it will not back down. It probably won’t have to.

The proposals have met with anger from a large swathe of the public, understandably irate at the thought of being made to work longer than their parents for the same – or possibly less (in relative terms) – pension. And it has met with opposition from labour unions, traditionally some of the Socialist Party’s closest allies. But, with the exception of members of the Communist-led United Left coalition, it has not been frontally rejected by opposition politicians on whom the Socialists, who lack a majority in Congress, will have to rely to get any reform enacted.

After all, politicians who are in opposition now might one day be in power:  they would rather sit back and watch Zapatero take the flak for reforming the system today than having to deal with it themselves on their own watch tomorrow. On top of that, most realise the system faces a very real problem – the figures have been staring them in the face for years.

As Spanish life expectancy increased in the second half of the 20th century and birth rates declined, the foundations of Spain’s pension system slowly began to crumble. The average Spaniard can today expect to live to the age of 81, compared to 70 in 1975.

“In 1975, people over 65 claimed a pension for five years on average, now it is 15 years,” Economy Minister Elena Salgado has noted.

The pension system is not only having to pay people pensions for more years, but it is also having to pay them to more people, relative to the total population.

Currently, people aged 65 and up account for around 13 percent of Spain’s population of just over 45.8 million and their pension payments equate to around 8 percent of Spanish GDP. Assuming current demographic trends continue – and that’s a big if, given the difficulties of accurately predicting long-term population changes – by 2049 over-65s will make up almost one in three people in Spain, according to figures from the Spanish National Statistics Institute (INE).

With Spanish women having only 1.4 children each on average, the only factor that has kept Spain’s population growing in recent years has been immigration. But with Spain’s economy unlikely to go from bust to boom any time soon, the flow of migrants is likely to dwindle. That may help ease labour and social pressures in the short term but it also sets Spain a dangerous demographic course.

Taking pensioners, children and other non-economically active members of the population into account, by 2049 there is expected to be just one person working – and contributing to the Social Security system – for every so-called dependent. Paying pensions, by then, would carry a price tag equivalent to almost 15 percent of GDP.

By raising the pension age by two years the government reckons that the cost of pension payments will fall by the equivalent of two percentage points of GDP. Each additional year of contributions should shave another 0.2 percentage points off the pension price tag, helping to keep the cost of the pension system at a more sustainable level as the population ages and the workforce declines.

The OECD, which, like the EU, has applauded the reform proposal, is urging Spain to go a step further and implement legislation that would allow for rolling reforms to better match the pension age to changes in life expectancy. It is also urging the government to encourage the adoption of private pension plans.

The organisation of 30 advanced economies noted in a recent statement that Spaniards’ savings in private pension plans equate to just 7 percent of GDP compared to the developed country average of 60 percent. Spaniards, in effect, have put too much faith in the state to provide for their needs.

In light of such statistics, lawmakers, including representatives of the main opposition centre-right Popular Party, therefore generally agree that reforming the pension system is necessary. They will have a harder time agreeing on how exactly to go about it, and, especially, on selling the idea to an increasingly disheartened electorate.

An issue for everyone and their mother

“Why should I have to work more and pay more to receive less than people who are retiring now. It doesn’t seem fair,” complains Miguel, a media studies student in Palma de Mallorca.

Many Spaniards feel the same way. More than 450,000 of them have joined a group on Facebook called Va a trabajar tu puta madre hasta los 67 años (or Your bitch mother is going to work to 67). Some are calling for a general strike.

Critics have many genuine gripes about the reform proposal and the likely perpetuation of the unfairness inherent in the current system. After all, if the average Spanish labourer, office worker or waiter currently has to work for 15 years to be entitled to a pension (35 to receive a full pension) and may have to work 20 or 25 for the same in the future, why is it that members of Congress and other elected officials only have to serve seven years to claim 80 percent of their entitlement and just 11 years for the full whack?  And, many wonder, with unemployment among people aged under 25 running at 45 percent, will not making older workers stay in their jobs longer not keep even more job opportunities from the young?

Zapatero will have to clearly and publicly address these and other questions if he is to stand a chance of avoiding a public backlash that could cost his Socialist Party dearly in regional and local elections next year and in the general election in two years time.

More importantly though, he will have to get to grips with the deeper causes of why the pension system is at risk and why so many young people are out of work. That will mean reforming the labour market and doing away with the peculiarities of a dual contract system that restricts worker mobility, reduces job security for many employees in the primes of their lives (hence lowering the birth rate) and encourages employers to use early retirement as a means to get rid of costly, older workers on fixed contracts (hence overburdening the pension system).

When he gets round to dealing with that, he may find he not only faces a ticking time-bomb but a political minefield.