But how did things get this bad?
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
By most measures, sun-blessed Spain is an idyllic place to grow old in. Life expectancy is among the highest in the world, and the national pension fund’s payout ratio (pension as percent of final salary) is the second highest in Europe after Greece. But if current trends are any indication, that may soon be about to change.
The country’s Social Security Reserve Fund, which was meant to serve as a nationwide nest egg to guarantee future pension payouts — given Spain’s burgeoning ranks of pensioners — has been bled virtually dry by the government. This started ever so quietly in 2012 when the government began withdrawing cash from the fund. Some of it was used to fill part of the government’s own fiscal gaps while billions more were tapped to cover the Social Security system’s growing deficits. As a result the pension pot has shrunk from over €66 billion in 2011 to just €15 billion in 2016.
To avoid wiping out the fund altogether this year, the Spanish government extended a €10.1 billion interest-free loan to Spain’s social security system, which enabled it to pay out the two extra pension payments due in June and December. That way, only €7-7.5 billion will be tapped from Spain’s public pension nest egg. Emptying the pot altogether this year would have been politically unpalatable, says El País. Instead, it will be emptied next year as the social security system racks up yet another massive annual shortfall.
Last year it registered its biggest deficit in its history (€18.1 billion), which was covered by the pension pot. In 2017, the deficit is forecast to be €16.6 billion, according to the government’s own projections. That’s roughly 1.5% of Spanish GDP. Another €18-20 billion will be needed next year. Successive deficits are expected until at least 2020, when there will still be an annual deficit of around 0.5% of GDP — and that’s according to the government’s own rosy figures!
Without large annual cash transfusions paid for with freshly issued government debt, the system would have collapsed this year. But the fix is merely temporary and it’s likely to store up a whole new slew of problems for a country that’s already seen its public debt-to-GDP ratio triple over the last ten years. If, as expected, the interest on that debt continues its slow upward trajectory as the European Central Bank gradually pares back its purchases of European sovereign debt, the strain could become too much.
But how did things get this bad?
There are two main causes for Spain’s pensions nightmare: the rapid ageing of Spanish society, and the mass destruction of decent or semi-decent paying jobs in the wake of the financial crisis. Both problems are evident across most advanced Western economies, but they are particularly pronounced in Spain.
When Deaths Outperform Births. For the last two years Spain has registered more deaths than births. The last time that happened for a sustained period of time was during the bloody Civil War years (1936-39) when more than half a million people perished.
The current trend has only just begun. In 2014 Spain’s National Statistics Institute (INE) predicted that an era of more deaths than births would begin in 2015 and the gap would continue to widen until 2062. It said the country’s population, now numbering more than 46 million, would probably fall by more than a million over the next 15 years and by 5.6 million over the next 50 years. It’s a trend that is already having very serious implications for the sustainability of Spain’s public pensions system.
Bullshit Jobs, Bullshit Pensions. The popping of Spain’s mind boggling property bubble and the subsequent collapse of most of its savings banks triggered a wave of job destruction in Spain that was virtually unparalleled in other parts of Europe.
In return for a €60 billion financial sector bailout, the Troika demanded harsh wage cuts and sweeping labor reforms. The Rajoy administration was more than happy to oblige, with the result that most of the new jobs that have been created in recent years are both poorly paid and highly precarious, which may be good news for cost-cutting employers (at least in the short term), but terrible news for Spain’s pension scheme.
Many of Spain’s young workers cannot even support themselves financially, let alone millions of their grandparents’ generation. Even though unemployment has declined from the mind-watering 27% apex reached in 2013 to today’s still depression-level 16.5% and the number of people paying into the social security has steadily increased, there’s no way that Spain’s new generation of unemployed, underemployed, badly paid, or “ni-nis” (Not in Employment, Education or Training or NEETs) will be able to maintain 8.6 million pensioners, who are living longer than ever and are used to earning an average state pension of €921 a month, one of the highest as a percentage of final salary in Europe. Their number is expected to almost double to 15 million by 2042.
At some point in the near future the Spanish government will have to make a very uncomfortable choice: either the average state pension will have 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.
Yet the government, which enjoys a hard-earned reputation for not tackling problems until they’re too big to tackle is talking about tax cuts, not rises. As El País reports, there’s little sign of any workable solution in the offing even as the ranks of retiring baby boomers grow by the day. By Don Quijones.
For Italy’s teetering banks, there a sharp dose of Deja Vu. Read… The Next Italian Bank Threatens to Topple
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.