Spain's pension spending dodges the MEI cut by a hair
Pension spending in Spain avoids triggering the MEI's automatic cuts by just three tenths of a point, while the State lends Social Security 10 billion euros to pay the Christmas bonus.
English · Original discussion in Spanish · Published
Spain's pension spending dodges the MEI cut by a hair
A 10 billion euro loan from the State to the Tesorería General de la Seguridad Social (Social Security Treasury) to pay pensions and the Christmas bonus before the holidays. That is the scene hovering over any discussion about the sustainability of the system: if you have to borrow to cover retirees' payroll, something is wrong. But the loan does not prove the system is unsustainable by design; it shows that the single fund has been balanced for years with public debt. The difference between one thing and the other is what separates an economic analysis from a slogan.
The trigger of the latest episode is technical and almost comical: pension spending avoids by three tenths of a point the clause that activates the automatic increases of the Mecanismo de Equidad Intergeneracional (MEI, an intergenerational equity mechanism). Three tenths. That razor-thin margin is what, according to the most cynical reading going around, keeps the Government from imposing another cut on workers' paychecks just before an election. The figure is no hoax: it is in the Boletín Oficial del Estado (official gazette) and in the budget execution tables.
Are pensions in Spain unsustainable?
The starting argument is a demographic ratio. Today each pensioner depends on the contributions of 2.44 workers. By 2043, according to the system's own projections, that figure will fall to 1.65. The figure is striking. It was also striking in Greece, Finland, Portugal, Italy and Japan, which are already at those ratios or will surpass them. None of those countries has privatized its pensions. None has raised the retirement age beyond 67. The conclusion is uncomfortable for both sides: the demographic ratio does not by itself determine the collapse of a pay-as-you-go system, but it does not disprove it either.
Some argue the problem is not the number of contributors but the size of pensions. If your pension comes from a percentage of the wages of N workers, fewer workers means a lower pension, unless you raise that percentage, and there is a limit to how much you can raise it without employment falling. The most optimistic calculation assumes productivity and wages will grow enough; the pessimistic scenario assumes the 1.65 ratio cannot sustain the current replacement rate.
The replacement rate nobody looks at
Spain has a replacement rate close to 100% for low wages, something that happens nowhere else in its peer group. In Italy the minimum pension is around 600 euros over thirteen payments; in France, about 750 over twelve. The Spanish minimum pension is higher and is raised for electoral demagoguery, according to the recurring criticism. On top of that comes the widow's pension, still universal as it was sixty years ago, when the family model was a different one.
The pay-as-you-go system is not only unfair because it is unsustainable, critics argue: what you receive does not depend on what you contributed, but on what today's workers contribute. A funded system would be fairer in that sense, because what you collect is what you accumulated. The problem is that transitioning from one model to the other requires paying twice for decades, and no one has explained where that money would come from.
The precedent of private pensions in Europe
Sweden, Switzerland, Germany and the Netherlands combine pay-as-you-go and funded schemes without anyone starving, according to defenders of mixed systems. It is the argument that most unsettles those who reduce any reform to a Chilean-style privatization. The Chilean experience is cited both as a threat and as an example depending on who is talking, but the fact is that European mixed systems exist and work under rules different from the AFP model.
The Japanese case deserves a paragraph of its own. There, many people stay in the workforce in part-time jobs that require no physical effort until very advanced ages: they collect half a salary and half a pension for as long as they can. It is not a designed solution, it is an adaptation forced by demographics. And it has not prevented the country from piling up the largest public debt in the developed world.
Who pays for the party
The deeper criticism is not aimed at the grandfather who contributed for forty-five years, but at the management. Many of those workers took to the streets and faced repression during the dictatorship and the Transition to win labor rights that are now being cut from the couch. While young and old hurl insults at each other over pensions, low wages, precariousness and productivity that never takes off stay out of the spotlight.
Pension spending is paid today with public debt. Money is not borrowed to build bridges or a rail network: it is borrowed to cover the payroll of those who already own their home outright. In a rational system, no one who works should live worse than someone who no longer works. That is the unsettling fact: the debate is not whether the system holds up, but at the expense of which generation it does.
This analysis is based on the data and arguments presented in the public debate on the sustainability of the pension system. It does not constitute financial advice.
A 10 billion euro loan from the State to the Tesorería General de la Seguridad Social (Social Security Treasury) to pay pensions and the Christmas bonus before the holidays. That is the scene hovering over any discussion about the sustainability of the system: if you have to borrow to cover retirees' payroll, something is wrong. But the loan does not prove the system is unsustainable by design; it shows that the single fund has been balanced for years with public debt. The difference between one thing and the other is what separates an economic analysis from a slogan.
The trigger of the latest episode is technical and almost comical: pension spending avoids by three tenths of a point the clause that activates the automatic increases of the Mecanismo de Equidad Intergeneracional (MEI, an intergenerational equity mechanism). Three tenths. That razor-thin margin is what, according to the most cynical reading going around, keeps the Government from imposing another cut on workers' paychecks just before an election. The figure is no hoax: it is in the Boletín Oficial del Estado (official gazette) and in the budget execution tables.
Are pensions in Spain unsustainable?
The starting argument is a demographic ratio. Today each pensioner depends on the contributions of 2.44 workers. By 2043, according to the system's own projections, that figure will fall to 1.65. The figure is striking. It was also striking in Greece, Finland, Portugal, Italy and Japan, which are already at those ratios or will surpass them. None of those countries has privatized its pensions. None has raised the retirement age beyond 67. The conclusion is uncomfortable for both sides: the demographic ratio does not by itself determine the collapse of a pay-as-you-go system, but it does not disprove it either.
Some argue the problem is not the number of contributors but the size of pensions. If your pension comes from a percentage of the wages of N workers, fewer workers means a lower pension, unless you raise that percentage, and there is a limit to how much you can raise it without employment falling. The most optimistic calculation assumes productivity and wages will grow enough; the pessimistic scenario assumes the 1.65 ratio cannot sustain the current replacement rate.
The replacement rate nobody looks at
Spain has a replacement rate close to 100% for low wages, something that happens nowhere else in its peer group. In Italy the minimum pension is around 600 euros over thirteen payments; in France, about 750 over twelve. The Spanish minimum pension is higher and is raised for electoral demagoguery, according to the recurring criticism. On top of that comes the widow's pension, still universal as it was sixty years ago, when the family model was a different one.
The pay-as-you-go system is not only unfair because it is unsustainable, critics argue: what you receive does not depend on what you contributed, but on what today's workers contribute. A funded system would be fairer in that sense, because what you collect is what you accumulated. The problem is that transitioning from one model to the other requires paying twice for decades, and no one has explained where that money would come from.
The precedent of private pensions in Europe
Sweden, Switzerland, Germany and the Netherlands combine pay-as-you-go and funded schemes without anyone starving, according to defenders of mixed systems. It is the argument that most unsettles those who reduce any reform to a Chilean-style privatization. The Chilean experience is cited both as a threat and as an example depending on who is talking, but the fact is that European mixed systems exist and work under rules different from the AFP model.
The Japanese case deserves a paragraph of its own. There, many people stay in the workforce in part-time jobs that require no physical effort until very advanced ages: they collect half a salary and half a pension for as long as they can. It is not a designed solution, it is an adaptation forced by demographics. And it has not prevented the country from piling up the largest public debt in the developed world.
Who pays for the party
The deeper criticism is not aimed at the grandfather who contributed for forty-five years, but at the management. Many of those workers took to the streets and faced repression during the dictatorship and the Transition to win labor rights that are now being cut from the couch. While young and old hurl insults at each other over pensions, low wages, precariousness and productivity that never takes off stay out of the spotlight.
Pension spending is paid today with public debt. Money is not borrowed to build bridges or a rail network: it is borrowed to cover the payroll of those who already own their home outright. In a rational system, no one who works should live worse than someone who no longer works. That is the unsettling fact: the debate is not whether the system holds up, but at the expense of which generation it does.
This analysis is based on the data and arguments presented in the public debate on the sustainability of the pension system. It does not constitute financial advice.
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Summary of a discussion on Burbuja.info - Foro de economía, actualidad y política., translated from Spanish and reviewed before publication. Read the full discussion (120 replies).
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