The Reserve Fund further complicates pensions in Spain


El Fondo de Reserva de la Seguridad Social española sale del ránking mundial de fondos de pensiones y su imparable acumulación de pérdidas dejan sus activos en mínimos históricos. Mientras tanto, la situación del Fondo siembra dudas sobre la sostenibilidad del propio sistema de pensiones en España.

El Fondo, que se sitúa así apenas por encima de los 25.000 millones de euros, marca un nuevo mínimo en la última década y acentúa su tendencia decreciente desde 2012. Solamente en los primeros siete meses de 2016 se han gastado casi 7.500 millones, y están previstos desembolsos adicionales de 9.700 millones hasta diciembre. Esto supondría una reducción total de 17.200 millones en un año, cifra récord desde la constitución del Fondo. Según las previsiones de la Autoridad Fiscal Independiente, de mantenerse la situación actual los recursos se agotarían por completo en 2019. Sin embargo, para analizar las causas de la situación actual, es necesario entender las fortalezas y debilidades del sistema de pensiones español que está en vigor desde 1963.

In many countries (United States, Canada, Australia) there are “funded” pension systems, based on individual savings. In these cases, the State receives periodic contributions from each worker and invests them in risk-free assets. Upon reaching retirement age, the taxpayer will begin to receive the capital that he has contributed plus the interest generated throughout his working life. In this way, an equitable system is guaranteed (since the benefits received correspond directly to the contributions) and sustainable in the long term, since current pensions do not affect the active population in any way, charging it only with indirect costs ( health, dependency care, etc.) of the maintenance of the retired population.

The current Spanish system, on the other hand, can be classified among those commonly referred to as "distribution". This means that the contributions of active workers (although they will be counted in the calculation of the pensions that will correspond to each taxpayer in the future) are not destined to the workers themselves but to the payment of pensions for those already retired. In this way, it is the active population that assumes all the costs derived from the maintenance of the retired population, and the stability of the system depends exclusively on the number of active workers in relation to the retired ones. In order to prevent a possible non-payment of pensions in the future, in 2000 the Reserve Fund was set up in Spain, which periodically accumulated and reinvested the annual Social Security surpluses. However, given the onset of the crisis, the Spanish authorities have decided to use the Fund to ensure the payment of pensions, which explains the increasingly pronounced decline in their assets. But the deterioration of the Social Security accounts, which have gone from surplus to deficit, is due to even more complex causes.

In the first place, there is no doubt that the increase in unemployment (which went from 7.95% in 2007 to 20% today) as a direct consequence of the crisis has had a double effect: on the one hand, by destroying jobs, employment has decreased. contributions, while the growth in the number of unemployed has meant more demand for unemployment benefits. In other words, the fall in employment has meant for Social Security a reduction in income and an increase in expenses. This is how the system's continued surplus has turned, since 2010, into a severe chronic deficit. In terms of sustainability, in Spain the number of employed persons has fallen to 17.8 million in the second quarter of 2016 (compared to 20 in 2007) while pensioners have increased by 1 million (from 7.5 to 8, 5 in the same period). This means that the country has gone from having 2.7 contributors to 2.1 for each retiree.

However, the aggregate level of employment (as well as the relationship between taxpayers and pensioners) cannot by itself explain the deficit status of Social Security. If this were the case, the net job creation of the last three years would probably have corrected the problem (at least partially) but it was precisely in this period that the Reserve Fund has decreased the most. The reason is none other than the reduction in real wages (with a 2.7% fall in the private sector) caused in turn by greater labor flexibility, by the increase in temporary and part-time contracts and because the sectors Higher added value (such as technology) remain relatively weak in the Spanish economy as a whole, leaving most of the job creation in the hands of sectors (such as tourism) with low qualifications and low wages. This is how the evolution of the economy in recent years has given rise to a process of internal devaluation, which has ended up reducing income from contributions since these are directly linked to wages.

On the other hand, if job destruction and internal devaluation have destabilized the system in the short term, there is a much greater risk factor in the long term, and that is the evolution of the Spanish population itself. In recent decades, Spain has undergone a profound demographic transformation that has turned a predominantly young country into one that is increasingly aging, where deaths are already beginning to exceed births. In this sense, if in 1963 (the year in which the current pension system was designed) those under 19 years of age accounted for more than 35% of the population, today they do not reach 19%. On the contrary, those over 65 have gone from 3.8% to 14% in the same period. It is not simply a question of an increase in life expectancy, but of a fall in the birth rate that no longer even ensures generational renewal. If to this we add other factors such as the emigration of young people (with the aggravation that those who leave the country are usually also the most qualified workers) the result is an unsustainable system in the long term and whose deterioration has been accelerated due to the economic crisis.

Finally, the management of the Reserve Fund has also given rise to doubts, since most of the resources (reaching 97% in 2012) are invested in Spanish public debt. This not only implies a greater risk due to the lack of diversification but also a significant opportunity cost in an environment with low interest rates and rising bond prices, as evidenced by the fact that Spain already issues debt securities with negative profitability. In conclusion, the use of the Fund to finance the deficit of the State has prevented the investment of these resources in other more profitable assets, thus limiting the income of the system.

Faced with a situation as critical as the current one, economists have taken different positions. The most critical consider that the pension system is in itself unstable, since its long-term sustainability is not based on the benefits that it is able to obtain with its own resources but with the contributions of new contributors: a structure that, saving the differences, it is dangerously similar to pyramid scams, where the profits of the shareholders do not come from the profitability generated but from the inflows of new investors. The problem is that these systems often collapse when interested investors are no longer found and therefore it is impossible to give back to shareholders. According to this point of view, Social Security would be in the same situation (seeing the contributions of new contributors reduced) and the only possible solution would be to definitively replace the current pay-as-you-go system with another funded system.

An alternative approach would be to maintain the current system, although reforming some of its essential aspects. The proposals range from the creation of new taxes to the increase in social contributions, through various formulas for the distribution of expenses between the Government and Social Security. There are also mixed pay-as-you-go and capitalization models (such as those applied in Germany and the Netherlands) that could guarantee a safe transition towards a more sustainable system.

Finally, the progressive decrease in the number of births seems to demand a greater boost to the birth rate. In some European countries, long-term plans have been put in place that include maternity benefits, family conciliation policies and incentives for large families.In Spain, however, the issue seems to be far from the economic debate and the resources allocated to family policies only account for 1.3% of GDP (the European average stands at 2.2%), while the new framework employment (with 46.48% youth unemployment, longer temporary employment and lower wages) is a brake on the creation of new families.

In any case, regardless of the shortcomings of the current system, it is clear that a workforce engaged in low-value-added activities will be unable in the long term to ensure a sufficiently high standard of living for the inactive population, and even less so if the numerical ratio between one and the other continues to decline. The example of Greece shows that one of the most backward economies in the euro zone was unable to pay pensions that accounted for up to 96% of working wages (German retirees, for example, do not reach 70%). The reason is that, simply, the workforce did not generate the necessary surplus to finance these benefits. The Greek case could serve as a warning for Spain to seek a way out of the pension problem through an increase in productivity and added value that allows at the same time an increase in employment and wages. Today most of the Spanish political agents are looking for new distribution formulas and propose to continue increasing the tax burden on a private sector already heavily affected by the internal devaluation. But unfortunately, when an economy is unable to generate wealth, how to distribute it is irrelevant.

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