Spain Is Aging Too Quickly

November 2013 | Global

An aging population and rise in unemployment have brought to light a new negative trend: Social contributions from the working population are no longer enough to pay benefits to pensioners – at least not in the amounts they have grown accustomed to.

Politicians are calling this phenomenon one “worthy of attention,” while pensioners are calling it “a catastrophe.” The first to sound the alarm was the province of Tarragona, where there were 262,550 working people and 154,144 pensioners in 2012. It has always been considered that the ideal ratio was 2:1 – two working people to one pensioner. In Tarragona, that figure is 1.7:1, which has already generated a budget deficit of €250 million per year. The province’s average pension is €826. Tarragona, like the rest of Spain, is accustomed to living well.

Prior to 2007, there was an average of 2.5 workers for every Catalan pensioner, allowing some to receive pensions of more than €1,500 per month. But now all forecasts indicate that the situation will worsen over time. The European Union’s first condition for rescuing Spain was pension reform. It has been discussed for a long time, but only in the throes of the crisis has the unpopular government started doing something about it.

The Government Decides

In September 2013, the first amendments to the law governing retirees’ pensions. Now, pension benefits won’t be revised every year based on changes in the consumer price index (CPI), but the starting level of pensions will be calculated according to the average life expectancy. Changes in the CPI had increased pensions annually by 2-3%. Now they will increase by a maximum of 0.25%, and increases in payments will be dependent on the solvency of social protection funds. That means that if the country is in a deep crisis, pensions could “virtually become paupers” as the trade unions say. Meanwhile, workers’ wages don’t always grow in sync with the CPI.

This reform hasn’t gotten approval from the trade unions or from the political opposition. They are all saying the same thing: Pensioners will quickly lose their ability to be consumers, but the pension problem has only been scratched on the surface and for the short term. For example, in 2014, Tarragona pensioners could lose an average of €200 per year, or €16 per month.

A Matter of Perspective

Raul Navarro, J.D., and Senior Professor at Rovira i Virgili University in Tarragona, says that “the measures adopted by the government are not enough. It is irresponsible on the part of the government. These reforms should have been put in place during times of economic boom, instead of paying out social benefits right and left. Now the situation is very difficult and these measures will only provide quick relief by saving nearly €1 billion over the next three years. But it doesn’t solve the main problem.” According to Navarro, the current pension reform is just a modest political step. The government is not acting as it should out of fear of losing 7 million votes from Spanish pensioners. There is now a budget deficit and the provinces that are sliding into poverty are reaching into the state’s piggy bank in the hope of patching up their financial holes.

Navarro is pessimistic about the future of Spanish pension benefits: “The situation is what it is and no one imagined that pension reform would be needed before 2020. But the high unemployment has taken its toll. Real average pensions that are capable of being paid by Social Security aren’t higher than €400. In order to keep them at the current levels of €600-1,000, there should be two working people for every pensioner, but we are approaching a ratio of 1:1.”

He believes the only way out of this situation is to increase the retirement age and revise the system for calculating benefits. “The retirement age was already raised to 67, but it needs to be raised again to 70. If pensions are calculated based on the social contributions of everyone working, pensioners could lose about 40% of their benefits. People need to be told the truth as it is. Additional pension plans could be put in place. It’s possible that not everyone is in the position to put money aside, but we could come to a collective agreement, whereby part of the pension contributions come from the employee and part from the employer. The necessity of some subsidies should also be reviewed, such as widow’s benefits. Currently, you can receive this benefit while working and receiving other benefits and any widow may claim it. But in theory, this benefit should be calculated based on the family’s income, since rich families wouldn’t need such benefits.”

Let Others Work More

Some feel that solving the problem depends entirely on the state of the labor market: Why even revise pensions when you could just give people more work? “This is the ideal pattern of development, but the notion that there is an option to create unlimited jobs is an erroneous one,” says Navarro. “In 2040, Spain will have 15 million pensioners, but will hardly have 30 million working people. We assume that the county will recovery economically and have a certain level of stability. By 2040, we expect that there will be 18.5 million full-time employees, 3.5 million temporary workers, and 12% unemployment – a far cry from 30 million. We need to prepare for the fact that the Social Security contributions of one person will only pay for the pension of one pensioner, which is why a review is needed of the entire pension system and especially the guarantee of pensions for the current working population.”

The trade unions suggest yet another option for solving the issue. As usual, they sharply condemn the government’s actions and blame it for “taking measures that jeopardize the rights of pensioners, present and future.” Jaime Pros, a representative of the Workers Commission of Tarragona, says that in the next 15 years, pensioners will lose 15-28% of their income. “As usual, the government has decided to cut costs rather than increase revenues. We have concluded that there is a set of measures which could bring in €48 billion instead of cutting. For example, a temporary increase in Social Security contributions on the working population, which would allow pensions to be paid. Common efforts with the government and businesses would make it possible to grow the pension fund. In return, the state should take over paying the salaries of Social Security workers, as they do for the other government employees, thereby saving money for benefit payments. Also, the government’s economic recovery response isn’t enough to replace the 3 million jobs lost in the crisis. The high unemployment rates and poverty have decreased the number of those receiving social contributions. The government should reconsider some benefits, such as survivor’s pensions and benefits to poor families. These monies should be paid out of the overall state budget and not from the Social Security fund. At the same time, tax reform is urgently needed. High-earning citizens should pay higher taxes and penalties for tax fraud and ‘black market’ wages need to be stricter.”

Text: Valentina Rinkon