Doubts emerge as to who is saving whom.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Structural unemployment and falling wages, precarious jobs, an endless brain drain, a rapidly ageing population, and the government’s constant pilfering of the national pensions pot have all taken their toll on Spain’s social security system. As we warned last November, 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.
To avoid wiping out the fund altogether in 2017, 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 about €7.5 billion would be tapped from Spain’s public pension nest egg. Emptying the pot altogether last year would have been politically unpalatable, said El País. Instead, it will be emptied this year as the social security system racks up yet another massive annual shortfall.
In 2016, the system registered its biggest deficit in its history (€18.1 billion), which was covered by the pension pot. In 2017, the deficit is estimated to be about €17 billion, according to the government. That’s roughly 1.5% of Spanish GDP. The deficit in 2018 is projected to be €18-20 billion.
Clearly, Spain’s pay-as-you-go pension system, like so many in Europe, has sustainability issues. After years of inaction (apart from bleeding the public pension pot dry), the government is finally beginning to take measures ostensibly aimed at addressing these problems, by:
1. Significantly reducing the size of the monthly payouts for pensioners. The national pension fund’s payout ratio (pension as percentage of final salary) is the second highest in Europe after Greece, but that is about to change in a very big way. According to a study by the consultancy group International Financial Analysts, following the government’s latest round of measures, a pensioner who retires today will lose on average the equivalent of €350 a month in purchasing power over the duration of their retirement. That’s a lot of money, especially for the roughly two-thirds of pensioners on less than €1,000 a month.
2. Gradually increasing the minimum pension age, which has risen from 60 to 65 and five months in recent years but is expected to rise to 67 in the coming decade. According to Spain’s most influential business lobby, the Spanish Confederation of Business Organisations, the lower limit should eventually be raised as high as 75.
3. Carving out a larger role for private pensions, many of which are in desperate need of fresh funds.
In the last few weeks, senior government representatives have suddenly begun talking up the need for people to prepare financially for their retirement. In synchronized fashion, the country’s largest pension fund managers have launched a massive PR campaign on radio and social media to win the hearts and minds of pensioners-to-be. The message could not to clearer: get saving for your future.
In an audacious masterclass of financial ignorance, Celia Villalobos, an MP and president of the cross-party Toledo Pact committee on pensions, encouraged young people to save just two “little” euros (eurillos) a month to safeguard their financial retirement. The magic of compound interest would do the rest, she said, somehow ignoring the fact that in the NIRP-zone, interest rates are at or near zero. And even the most gifted and trusted fund managers would be hard-pressed to turn the grand sum of €840 — the result of 35 years of saving 2 euros a month — into hundreds of thousands of euros needed for retirement.
In Spain more than eight out of 10 private pension schemes don’t even beat inflation. According to a study by professors from one of Spain’s most prestigious business schools, IESE, during the 15-year period between 2001 and 2016, the average return of Spanish pension schemes was 2.03%. Of the 335 pension plans launched in Spain during this period, 278 generated overall losses in purchasing power for their users. Just three funds were able to outperform Spain’s benchmark index, the IBEX 35.
Spain’s biggest private pension scheme, which is managed by the country’s third biggest bank, Caixabank, and has €3.42 billion of funds under management, generated average annual returns of -1.01%. In other words, after 15 years the scheme’s users were 15% worse off. And that’s before taking inflation into account.
Yet despite the general poor performance of private pension schemes in Spain and the exorbitant commissions they charge compared to other countries, on December 31, 2016, 7.1 million investors had €65.3 billion invested in them. But in the first nine months of 2017, something unprecedented happened: more money flowed out of the pension plans than into them. For the first time in 30 years the industry’s balance was negative, to the tune of some €580 million, as more and more people drew down their investments.
In an in-depth report on the sector, the financial daily Cinco Dias asked whether the private pension schemes had become a “zombie product.” The best way to turn the situation around, the report concludes, is to make them “quasi mandatory,” by essentially forcing companies to invest part of their employees’ salary in them, as happens in many other countries.
The government, banks and many economists will argue that this is necessary to make Spain’s pension system sustainable, but the question is sustainable for whom? Who is really being saved here? Spain’s current and future pensioners, or the largely bank-run pension schemes that are so desperately in need of fresh funds? If past is truly prologue, I’d put my two eurillos on the latter. By Don Quijones.
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