A New Crisis Is Brewing in Spain

The government raided the state pension fund. And now what?

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

When the Rajoy administration took the reins of power at the end of 2011, at the height of Spain’s debt crisis, the country’s Social Security fund had a surplus of over €65 billion, the result of a gradual accumulation of funds since the end of the 1990s. That money was supposed to serve as a nationwide nest egg to help cover the growing needs of Spain’s burgeoning ranks of pensioners. Instead, it has been used by the government to fill some of its own massive fiscal gaps, with the result that now, five years later, the total surplus has shrunk by 75%, to €15 billion.

Things have gotten so bad that in October the Spanish government was forced to admit to the European Commission that by the end of next year the surplus will have become a deficit, of around €2.6 billion. In other words, a fund that took 16 years to build up will have been plundered dry in less than half that time, at an average rate of around €11 billion a year.

The outflow reached torrential proportions this year. To date the government has removed over €19 billion from the fund — more than remains in its coffers. The biggest ever one-off withdrawal took place at the beginning of December when Spain’s new coalition government, with Mariano Rajoy still at the helm, plucked €9.5 billion out in one fell swoop. Part of the money will be used to cover the extra pay check Spanish civil servants receive at Christmas.

Removing such large amounts from the fund for fiscal purposes was against the law – until recently. As El Pais reports, the rules established to regulate the management of the fund set an annual withdrawal limit of just 3% of annual spending on public pensions. That would have meant that this year the maximum the government would been able to remove was €3.35 billion. But that 3% limit was suspended in 2012, the same year that the government spent tens of billions of euros bailing out Spain’s bankrupt savings banks and their creditors.

With the limit removed, the government was free to take as much as it wanted whenever it wanted, as long as it reported what it spent the money on. But the money is about to run dry, leaving the government with a potentially very serious shortfall at a time that the country’s public debt is more bloated than at any point since 1912.

According to Spain’s Secretary of State for Budgets and Spending, Alberto Nadal, there’s nothing to worry about. In a farcical attempt to calm public nerves he claimed that the almost complete disappearance of the rainy-day funds was merely a result of cyclical factors. Now that the economy, which he compared to a cake, is growing again, the fund should also begin growing again.

Then he delivered the bomb shell: if the worst comes to the worst and the reserve funds run completely dry, which the government has already admitted is about to happen, “the system will still be guaranteed because there will be transfers from the national budget to the social security,” the Minister told an investigating committee in Spain’s Congress. “Before, the Reserve Fund accumulated (Spanish) public debt and now what it’s doing is selling that debt, and if it runs out, it will just emit more public debt to sustain the pensions.”

As simple as that. After all, this is a government that has overshot its fiscal target for eight straight years, for which it was almost fined billions of euros by the European Commission earlier this year.

Meanwhile, the idea that Spain’s youngest workers will be able to support the country’s swelling ranks of pensioners is risible. According to Spanish economist Juan Torres López, the biggest problem affecting Spain’s pension pot (apart from the government’s raids on it) is the paltry wages the youngest generation of workers receive.

A case in point: ten years ago, “mileurista” — a term to denote someone earning €1,000 a month — was coined to highlight the plight of young workers with shitty, low-paid jobs. Today, with a youth unemployment rate of over 40%, becoming a “milleurista” has become something to aspire to.

Yet somehow the new generation of unemployed, underemployed, badly paid, or “ni-nis” (stay-at-home-kids) are now expected to maintain over eight million pensioners, who are living longer than ever and are used to earning an average state pension of €906 a month, the second highest (as a percentage of final salary) in Europe after Greece.

Clearly something has got to give. Either the average state pension is going to drop precipitously (unlikely, given that 60% of voters for Rajoy’s governing party are over 55 and 40% are over 65) or taxes are going to have to rise, big time. Rajoy has already committed to shrinking Spain’s budget next year from 5.1% of GDP to 3%, a goal he’ll fall far short of but he’ll do plenty of damage trying. Another rise in taxes will put the squeeze on internal demand, which has already been hit hard by a hike in business taxes last month.

One thing that’s clear is that whatever course of action Spain’s fragile coalition government ends up taking, the financial pain in Spain is about to rise, sharply. By Don Quijones.

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  17 comments for “A New Crisis Is Brewing in Spain

  1. Robert Siddell says:

    Poor Peter Putz was taxed to death to maintain Profligate Paul Politician’s Ponzi Scheme.

  2. Agent76 says:

    May 21, 2013 Why the whole banking system is a scam – Godfrey Bloom MEP

    • European Parliament, Strasbourg, 21 May 2013

    • Speaker: Godfrey Bloom MEP, UKIP (Yorkshire & Lincolnshire)


  3. michael says:

    looks like they took a page out of the US play book.

  4. George McDuffee says:

    Proving yet again the zero value of governmental assurances, guarantees and promises.

  5. Chicken says:

    Pension funds are raided by thieves and as a result, naive Millenials are upset with boomers.

  6. NotSoSure says:

    I miss the old days when the word “crisis” means something. Nowadays “crisis” is just another word for yawn especially when it comes to Europe.
    I think Europeans have way more money than they let out, plain and simple.

    • Chicken says:

      Perhaps the word “crisis” is an euphemism for “We’re raiding the public treasury again, b/c we’re entitled.”.

  7. John Doyle says:

    If anyone thinks this is just an aberration in today’s economy, I have news for them! Spain is just an early sign. All nations, even monetary sovereign ones will eventually go down the same path. As deflation will not reverse [there may be the odd bounce] recession will follow and then depression and mass defaults. No one who relies on taxes for funding has even a snowball in hell’s chance of being able to support such funding indefinitely.

    A monetary sovereign nation cannot technically go bankrupt in its own money, but the limit is still there, runaway inflation.
    What with the upper donor parasite class bankrupting the lower orders, plus the demographic trend, the retirement of boomers etc, there is just no solution. Spending needs are going up as income – even the value of the economy itself, is going down.

    We have painted ourselves into a corner. Nobody wants to see so nobody will make even a stopgap plan, but it is inevitable! A major crash from which we cannot return

    • Jerry says:

      You are 100% correct. This is where socialism’s tyres in the bitumen. It really is remarkable how long this has lasted. The west embraced socialism since the end of WWII.
      Here in the UK they have tricked people to pay for their pensions AGAIN. They made it semi compulsory to buy a pension. I remember thinking, hold on I have been paying taxes since I started working on the premise that I was providing for my pension but then the state started the TV campaign “I’m In”.
      The west is broke, please point at any western nation and they are all running deficits and they all have debt that they will NEVER payback. The boomers are done, they are not buying second homes, or boats, or second cars. Japan demographics were more advanced than the west and they peaked in 1992. That is why house prices there are still 60% down today from their highs in 1992. The west is done and the shift in power is towards the east.
      If you look at history the hallmark of a collapse is when a nation begins to debase its currency and that is what we have witnessed in the west for the past 10 years. All western governments are issuing bonds that are worthless, you might as well buy a bog roll.

  8. Sober Money says:

    Kleptocracy is the new norm. Now the US is one starting in late January. When the elites privatize publicly accumulated taxes, the economies self-destruct.

    Government is no longer the problem. Governments run by the elites are the problem

  9. mynamett says:

    Nothing surprising here. It is the same play book all over the world. Argentina did the same thing and many other countries too.

    The only assets left in western countries are in public pension funds.
    The only asset Canada has left now are in pension fund such as CPP, caisse de depot et placement, Ontario Teacher pension fund and so on. Expect all governments around the world to use this money to pay the interest on governmental debt. This is then end game where pension fund are used to pay interest on governmental debt.

    After that, I guess it is printing money full ahead with currency devaluation followed by stopping of international trade because of the lack of confidence in any currency.

    • George McDuffee says:

      RE: Argentina did the same thing and many other countries too.

      An interesting note is that while Kirchner/Fernandez did indeed nationalize the private pension systems in Argentina, the private pension plans did not provide equal/equitable returns for all participants, with some participants far “more equal than others” to borrow Orwell’s phrase.

      CFK used much of the resulting public pension fund money to provide mortgages for affordable single family housing, which makes it much more difficult for a government to embezzle the pension funds as the assets are the mortgages, not easily converted into cash. This is not perfect as there can be a loss in value due to inflation, but the pension assets were in part recycled back into the current real economy, and backed by real assets, namely the affordable housing units. FWIW: While utilitarian, these structures seem to have been well constructed from suitable materials, and should last as long as the mortgages.

  10. Steve says:

    It is all about blowing something up far beyond its economic sustainability and frequently out of synch with its historical and cultural uniqueness. Greece, Argentina, Spain, the USA? Get ready.

  11. Steve says:

    Maybe this is appropriate..

    “The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.”
    – Marcus Tullius Cicero 50 BC

Comments are closed.