Article published by José Alberto León in El Día on 06/28/15.
The recent statements by the governor of the Bank of Spain, Luis Linde, who stated this Wednesday that the public pension distribution system “leads inexorably to a reduction in long-term pensions” have sparked great media controversy. Linde highlighted the need to be realistic about the future of the public pension model, a system that is “indispensable” and that cannot be “replaced for obvious reasons”, but that must face the important problem of demographic evolution. “We have a very clear demographic problem, of a very sharp and profound drop in births and a greater life expectancy,” explained Linde, who added that “a Government cannot solve this with one or several laws.” \"It must be said\", he told the parliamentary spokespersons. \"Not saying it is hiding reality from the Spanish people, this must be stated clearly\", he claimed.
Linde's statements hit home, because the truth is that politicians have been hiding and failing to tell the truth on this issue for years. Whenever I am asked about the sustainability of our current pension system, I answer that anyone who knows how to perform the four basic mathematical operations (add, subtract, multiply and divide), and who is interested in applying them to our future pension system, will come to the same conclusion: it is unsustainable. To say otherwise is to be untrue or illiterate.
Demographic evolution makes it impossible for the Spanish public pension system to continue offering current benefits, and the current economic recession has only accelerated the moment in which social security will go into technical bankruptcy. The current deficit is almost 25 billion euros, which is being covered partly with the pension “piggy bank” and partly with taxes. Even creating half a million jobs a year sine die will never close the deficit.
Pension spending is rising unstoppably due to three unappealable forces: 1) more people enter retirement age than "leave", 2) the average pension rises, since the bases of those who enter are higher than the average, and 3) social security contributors are lost due to the destruction of employment generated by the economic recession.
Of all these factors, the first is what the Governor of the Bank of Spain calls “inexorable.” The other two may be temporary, but have less impact. In 2009 there were 7.6 million pensioners out of a population of 45.8 million inhabitants (16.5% of the total), and the INE estimates that by 2029 there will be 11 million pensioners (23% of the Spanish population) and in 2049 there will be 15.3 million out of 48 million inhabitants (32%). Double the number of pensioners with basically the same population as now, in a system that is already in deficit. The current pension model follows the distribution criterion as established in the sixties. The operation is simple: with income from social contributions, pensions are paid to the elderly. When it was launched everything was perfect: there were many young people and few retirees. But the social reality in Spain has changed, life expectancy has increased and contributions are not and will not be enough to pay pensions. Demographic evolution makes it impossible to continue offering current benefits.
So, despite the last three recent reforms of the pension system, the government that manages the country in the next legislature will have to make a new one. In what sense? Well, common sense says that we will have to hit all the boxes... link the pension collected with contributions throughout the working life and not just the last 25 years, in order to reduce the amount of the new pensions; continue to delay the retirement age so that the number of years in which the pension is collected remains at the current level (about 21 years on average) and does not increase with life expectancy; and removing some beneficiaries from the pension system (non-contributory, widow's and orphan's pensions), who are not directly linked to work and social security, but rather to social assistance and who, therefore, must be paid with taxes, of course, after adjusting the collection conditions, because no country in the world does it except ours. And there are more than twenty-eight thousand recipients of widow's pensions under the age of 45, compatible with any other pension and/or remuneration for work, who will receive a cumulative total of around 13,000 million euros for this concept throughout their lives. At almost half a million euros per head. It's not like they won the lottery, but it seems like it.
On the income side, little can be done because social security contributions in Spain are among the highest in Europe and represent a tax on work that leads to a higher unemployment rate. At most, “unstop” the maximum of the contribution base (now at 3,606 euros per month) so that high salaries pay proportionally based on what they earn, without a maximum limit.
All of this leads us to a future with lower pensions for less time. Nothing new. European retirees receive a public pension that represents around 42% of their last salary, while Spanish retirees receive around 75% of their active salary in the form of a pension. There is a downhill route. In conclusion, a clear message. Beyond any ideological or partisan conviction, there is an inexorable economic reality: the current pension system cannot be maintained and future pensions will be lower than the current ones. Anyone who says otherwise either doesn't know how to add or is lying.
