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, Raging Bull-Shit.
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