March 7, 2021

Two questions for public pensions | Economy

Two questions for public pensions | Economy

Are Spanish public pensions sustainable? The answer to that question is that it depends on what we understand by sustainability. If what we are asking is whether public pensions will be able to be paid with the collection of contributions in the foreseeable future, let us say that during the next 10 years, the answer is that, absolutely, no. The Social Security deficit expected for 2018 could be about 19,000 million euros and the forecast for 2019 could be around 22,000 million. In addition, in the coming years the increase in longevity, the retirement of baby boomers and the increase in pensionable rights of new pensioners will make the payroll of pensions continue to grow in the future.

If what we are asking is whether the Spanish State will continue to pay public pensions in real amounts reasonably similar to the current ones, the answer is undoubtedly yes. In 2018 in Spain there are, in round numbers, about 9.6 million pensioners and about 6.8 million people between 55 and 64 years old. In total, there are some 16.4 million potential voters for whom pensions are one of their fundamental concerns and who, logically, will defend them with their votes.

Under these circumstances, What will the current government do? and the governments that happen to him in the future? The same thing that the governments that have preceded them until now have done. Yield to the pressure of the pensioners and finance the pensions with charge to the General Budgets of the State; complement the financing of the Social Security with State credits; delay the fulfillment of the deficit objectives; and, ultimately, seek additional fiscal resources, either by increasing contributions, by increasing the rates of value added tax or other taxes, or by proposing additional tax figures.

Where would you start to reform Spanish public pensions? The first thing that the Government should do is a correct diagnosis of the real situation of the pay-as-you-go system. This diagnosis should be completed with a careful evaluation of its foreseeable evolution during the next decade, under different demographic and economic assumptions. Next, the Government should inform the Spaniards of the results of their analysis. This information should be collected in a letter that the Executive should send to all contributors over 50 years.

The content of that letter could be expressed in these terms: "Dear contributor: Like you, the Government of Spain is concerned about your pensions, we want you to know that the increase in longevity, the retirement of the baby boom generations and the fall The deficits that Social Security has accumulated in recent years are due in large part to these causes, as it is foreseeable that these deficits continue in the In the future, we have made a diagnosis of the system, as far as you are concerned, the conclusions of our analysis are the following: in 2017 you completed 50 years, you had a total of 25 years of contributions and your average annual price in the last five years was If you continue to contribute in an equivalent amount, and you retire at 67, according to our forecasts your pension will range between 2,300 and 2,500 euros. (12 payments) These amounts are measured in euros in 2018 and will be much higher in nominal terms due to inflation. The lower value corresponds to the most unfavorable demographic and economic scenario and the highest value to the most favorable among those we have contemplated. According to current legislation, this pension will be updated according to the consumer price index and charged as long as you live. "

It may seem like a dream, but I can not think of any technical reason that prevents the Government from sending a similar and personalized letter to all the 50-year-old and 60-year-old contributors. Nor can I think of any reason that prevents the Toledo Pact Commission from making a recommendation to Parliament and the Government in those terms. If the problem were that they do not know how to do the necessary calculations, I offer myself free to explain how to do them.

Javier Díaz-Giménez He is a professor at IESE Business School.


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