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Transatlantic Blog

Spain's pension protests would hurt the economy - and the family

Since February, Spanish cities and towns have been roiled by protests denouncing the nation’s pension system and demanding more government spending. The marches are fueled by radical left-wing politicians, chiefly the Podemos Party, which dreams about reviving the so-called “indignados” movement (sometimes called the “15-M Movement”), which held nationwide protests in 2011.

Behind the demonstrations, Podemos and its allies have advocated such policies such as linking pension rates to the Consumer Price Index (something the Ministry of Employment and Social Security warns would led to a 20-percent increase of income tax and higher public debt) or “safeguarding” them by constitutional means.

If the first of these proposals were applied, the cost would be excessive. For example, to pay for a 0.25-percent revaluation of benefits, the State would spend an estimated €330 million more than last year, when the Social Security ran a deficit of €18.8 billion, or 1.61 percent of GDP.

Spain’s social security system is based on Bismark’s model of redistribution. The average pension received by a Spanish retiree – which varies by region – is around €932, and public spending on that front has risen to a record of €8.925 billion. The pension system's reserve fund, created in 1997 by José María Aznar’s center-Right government, has seen major losses since 2012, even though the retirement age was raised to 67 years in 2011.

Last month, the Congress of Deputies opened a debate on reforming the pension system. The Socialist Party and Podemos asked the government to fund the system through tax increases, while the center-Left Citizens Party (Ciudadanos) proposed an income tax reduction for those who earn between €12,000 and €17,000.

Meanwhile, Spanish Prime Minister Mariano Rajoy committed to increase widows’ pensions by more than €100 a month between 2018 and 2019, in addition to boosting the minimum pension and instituting a negative income tax for people aged 80 and over. However, this would need to be approved in the 2018 general budget, and his People’s Party does not have an absolute majority.

Once again, politicians have failed to get to the root of the problem. Nobody recognizes the underlying issue is a failure of the redistributive system itself. As a result, no one offered even a mild reform based on, for instance, the Swedish pension system. Should my country adopt a system of private retirement accounts based on individual contributions, workers could retire with an account totaling between €605,00 and €815,000, depending on the fund managers, according to libertarian economical journalist Diego Sánchez de la Cruz.

Raising taxes or generating more public debt would only diminish the elderly’s purchasing power and real income, apart from destroying jobs and hurting the broader economy (where the national debt will remain between 90-to-100 percent of GDP, unless public spending is limited in some way.) The proof of this is on display everywhere such policies have been enacted. Venezuelan retirees have barely any kind of purchasing power. The pension check of 177,000 bolivares a month equals about $5 on the black market while just one kilo of flour may cost one-sixth that amount.

Absent structural reforms, Spain’s pension checks will keep on shrinking. The replacement rate – the percentage of an worker’s income that Social Security will replace – is poised to fall precipitously. Social Security checks will go from replacing 79 percent of a worker’s income in 2013 to 48.6 percent by 2060, according to a European Commission study – a decline of nearly one-third.

To make matters worse, Spain is feeling the chill of the West’s demographic winter. The ratio between workers and retirees likewise decreases over that period. According to Eurostat statistics, Spain has the second-lowest fertility rate in the continent. Yet there is no plan to boost the nation's birth rate through tax reform or the courageous promotion of pro-life and pro-family values.

Anyone who cares about Spain’s elderly, its youth, or its economic future must advise against policies that force the elderly to rely on the State. A redistributive, government-administrated pension system can only guarantee “very miserable” pensions, or a very miserable economy – or both.

The State not only disincentivises private savings but demands long-term thinking be set aside in favor of short-term political considerations. By and large, individuals tend to have a limited perspective – especially those already dependent on government services.

A pension based on individual contributions would guarantee both fairness and freedom. It would not subject individual savings to political criteria and allow workers to choose their own retirement program, whose investment strategy would be based on when they wish to retire.

Nevertheless, our concern is far more than mere utilitarian economics. A flourishing society, guided by good moral standards, implies the responsibility to protect the institution of the family. Taking care of the elderly is as essential as improving fertility and preserving the family unit.

Substituting government pension systems for family assistance has broken the bonds of mutual assistance and affection between relatives. Families are seen by socialists as a barrier to expanding bureaucratic government programs. Encroaching government must be replaced by individual control and an economic program that treasures the elderly by protecting Spain’s most important asset: the family.

(Photo credit: Fito Senabre. This photo has been cropped and modified for size. CC BY-SA 2.0.)

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Ángel Manuel García Carmona is a student of computer engineering in Spain. You may follow him on Twitter at @GarciaCarmonaAM.