Saturday, February 06, 2010

Spanish Pensions Work....So They Must Be Stopped!

Let's turn our attention to the question of pensions, and the proposal by the Spanish government to increase the retirement age to 67; a suggestion already dubbed the "pensionazo" here in Spain. The government did little to improve their already severely damaged reputation for handling of sensitive political issues when it was revealed that they had also submitted a document to the European Union suggesting that they planned to increase the number of years used to calculate the state pension from 15 to 25. This proposal, a covert way of cutting pensions further, was hurriedly withdrawn amidst unconvincing excuses about how it had just been an exercise rather than a genuine plan.

Almost the first thing to be said about the proposed change is that it may not happen for a while, if at all. Changes to the Spanish pension system go through what is called the Pacto de Toledo, an agreement to seek the maximum political consensus for the changes. That also means it takes time. Given that the Partido Popular has expressed opposition to the government's plan along with almost all other parties it is entirely possible that no change will be introduced before the next general election. The PP's opposition to the plan is almost certainly based around short term electoral advantage, given the party's current devotion to ultra liberal economic solutions it's very likely that they would favour something far more drastic once in office. Probably involving privatization. However, at the moment they flatly oppose all economic measures proposed by the government.

The really odd thing is to see such a proposal being presented as an anti-crisis measure. Odd because Spain's pension system isn't in crisis at all, it's been doing very nicely in recent years. Now of course that doesn't mean to say that things will always be that way and the balance between contributions and expected number of claimants has to be maintained....for the future. The automatic assumption made by many is that Spaniards are living longer and that therefore it's inevitable that they should work longer too. The problem is that figures on average life expectancy get used in a very loose way. The fact the life expectancy has increased by x number of years doesn't mean that all Spaniards can expect to see their own life expectancy increased by the same amount.

Nor is it that simple for everyone to keep on working, it's not the same for someone to be clambering over scaffolding at the age of 67 as it is to be sitting in an office taking the money that people pay for the house that gets built. There are some jobs where those doing them are lucky if they even reach 65. Another major problem with a generic raising of the retirement age is that it discriminates against the poorer sections of society; who tend to be those with the longest working lives. It's one of the paradoxes of welfare provision that those who do best out of it are often more hostile towards it.

There are many issues that should be addressed with Spanish pensions. Too many companies have used early retirement as a means of shedding labour and people who would find it difficult to find other work are therefore forcibly retired, but on pensions probably lower than they would have received by working longer. Also, it doesn't make much sense that a professional footballer can get early retirement for an injury that stops him from playing but not from doing all sorts of other jobs. The situation with the self-employed autonomos is frankly a bit silly. Most autonomos pay the minimum social security contribution until they reach 50, at which point they have to raise their contributions hugely to stand any chance of receiving a decent pension. So there is plenty of scope for sensible reforms which help to maintain the system, and if people want to work beyond 65 then they can swap places with me. Sorry, I meant to say they should be allowed to do so.

The fundamental problem is that the debate on the viability of state pensions is almost always contaminated by the ideological hostility that some have to their very existence. That's why favourable reports by banks or insurance companies on state pensions are about as rare as blizzards in Madrid in July. They want the business and it's in their direct interest to float the idea that the state system can't work. We're told that Spain must reduce the proportion of its GDP that goes on pensions even though the estimates for 2050 show that it will only just have reached the level that some European countries already have. Spain's social spending is well below that of many of its neighbours, yet much of the evidence on demographics suggests that extra spending can solve some of the problems that ultimately affect pensions. You want a higher birthrate? Then spend money on facilitating full, and flexible, access to the labour market for women so that they don't have to choose between work and having children. No such thing is likely to happen given the way things are going at the moment in Spain.

The loudest applause for the government plan comes from those who will either not need to work until 67, or who have very comfortable alternative arrangements for themselves. Members of the Spanish parliament only have to sit there for 11 years to qualify for the maximum pension. Yesterday we were informed that the president of the BBVA bank has had his pension pot capped, he's only left with a criminally low €79.5 million to see him through the tough years of retirement. The European employers federations says the move "goes in the right direction". Ah, but clearly not far enough for some.

Then there is the inaptly named Organisation for Economic Cooperation and Development (OECD) who have come up with a very bright idea. The OECD suggests that the Spanish government needs to dedicate more public resources to promoting private pensions, by protecting them from the vagaries of the market! This is a very "Washington Consensus" argument. Public money spent directly on pensions is bad, but spend it on guaranteeing banking profits regardless of what they do and it suddenly becomes good. Oh, and who was it who bought much of the worthless crap peddled as sound investment products by the banks and ratings agencies before the crisis? The pension funds. Take your pick.


santcugat said...

Sure, you can try to take money from pensioners and poor people, but at the end of the day, there's a limited amount of money there.

How about a little bit of enforcement on the higher income tax levels. Why isn't Spain buying lists of tax hiding Spaniards, or putting some pressure on Andorra (or just start scanning passports).

In the US, the top 1% of earners pay more in income taxes than the bottom 90%. The rates are lower, but enforcement is really hardcore.

Here in Sant Cugat, four of our neighbors have licence plates on their cars from Andorra. I can guess how much of their incomes goes to the Spanish government.

ejh said...

Most autonomos pay the minimum social security contribution until they reach 50, at which point they have to raise their contributions hugely to stand any chance of receiving a decent pension.

Serious question - is it 50, or is it 45? I was given to understand that it was 45, and as I'm 44, it's quite important that I should be right on this.

Obviously I agree with you about the ideological hostility. Part-belief in the necessary rightness of the market, part-deep hostility to anything which well-off people believe involves them paying for other people. I'm sure we'll get a lot of privatisation of pension provision across Europe in the next few years, or at very least severe pressure to do so on the grounds that pensions can't any longer be afforded. (I believe Merkel's coalition partners are very hardline on this issue, for instance.) Probably, as a result of this pressure, a lot of people will seek to make their own private provision in one way or another, and this will in itself reduce their own willingness to defend the state system.

As I always say, things are going to get worse before they don't get better.

Graeme said...


I think I read somewhere recently that Andorra has now started collaborating with the Spanish tax authorities but your point is completely valid, especially in a situation where so much of the profits of the boom are stored in €500 notes.


I'm pretty sure its 50, because the pension is calculated on the last 15 years of the working life - but check your own situation just in case there are different categories or rules for different types of autonomos. The main importance is that once you are into the final calculation period they apply a new lower ceiling on contributions.