“The Price of Raising Pensions”
By Francisco Coll Morales, courtesy of Civismo
In recent weeks columns of retirees, all pensioners, have begun marching from different parts of the country to the same destination: the Congress of Deputies, in Madrid. The purpose of this march is to demand that the government of Spain increase pensions, by revaluing them to match increases in the CPI. This campaign, months in the making, has been strengthened by imminent elections, with the real promise of an answer before the vote.
When we talk about pensioners, we do not mean any particular group. Although it might appear that its members lack influence because they are outside the labor market, in fact they have an electoral force that no other group in the country equals. They represent a huge vote bank: 35% of the electorate. Any political party that failed to include the demanded revaluation among its proposals would pay a high price.
Therefore, the issue of pensions constitutes a real headache for the political establishment. After years of neglect to pension reform, they will be forced to yield to collective pressure, or risk losing that percentage of votes. Thus the pension system represents a real problem for public accounts, in light of the high deficit it forces on the welfare state.
According to the data, the pension deficit is equivalent to 2.24% of GDP, that is, about 20 billion euros. Therefore the pension system in this country, in addition to being tapped out, constitutes a great burden for budgets that are already at the breaking point. But that’s not all. If we look at the demographic projections, with the birth rate at the level of the 1940s and the baby boomer generation entering retirement, we can anticipate that this deficit will reach 60 billion euros in the peak year of retirement of this group, at which point pensions will represent 12% of the country’s GDP. We are therefore faced with a serious threat, calling for urgent reforms.
According to the Bank of Spain, as well as institutions like BBVA Research, by 2050 the dependency rate –that is, the relationship between contributors and pensioners — is expected to reach parity. In other words, for each contributor there will be a pensioner who will have to pay to support them. Combined with the high rate of duplicate incomes that Spanish pensioners possess, as well as the high rates of unemployment and job insecurity, this is beyond unsustainable without immediate action.
In a bankrupt system there are only two options. The first would consist of a cut in pensions, to reduce the dependency rate. The second would entail a greater tax burden for taxpayers, which would suffocate the remaining active citizens of the country.As we can see, it’s impossible to simultaneously satisfy all groups. However, what pensioners have requested from the Government of Spain is a greater fiscal burden to pay pensions, as well as an increase in debt. Thus for their increased income they are asking on the one hand to mortgage future generations, which of course are not to blame for the current system being deficient; and, on the other, levying punitive taxes on a society that, now more than ever, needs to revitalize its economy to confront the scenario it faces.
And all this, if we go to the core of the problem, would achieve at best a revaluation of 11 billion euros. That would help pensioners, but remember: it has infinitely higher costs for future society.
In summary: let us agree that pensions can be raised, but if we do, we must also solve the structural problem of a deficit-based system, addressing it in an integral and non-cyclical way, by updating the Toledo Pact to breathe new live into its positive reforms. Otherwise, we will only borrow more and plunder future citizens through excessive taxes. And by so doing we will postpone the resolution of a problem that, with the passage of time, will only continue to grow, leading us again and again to the same unsustainable starting point. We have proof of this: to date only sticking plasters have been applied, and to this day they have never worked.
Francisco Coll Morales is a researcher with Civismo, regional director of HAC Business School in New York, and director of the treasury at AJE Region of Murcia.