Pensions reform under discussion

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In summer 2003, work is due to start on a revision of the Toledo pact, the 1995 agreement on the Spanish pensions system, in the light of gloomy demographic and expenditure forecasts. The government is seeking various changes, notably linking pensions to contributions paid over the entire career, the development of private pension schemes, a halt to early retirement and an increase in the retirement age. A recent European Commission report has contributed to the debate.

The 'Toledo pact' on social security and pensions reform (ES9710220F), concluded in 1995 by the political parties and social partners, is scheduled for revision in summer 2003. However, the debate started earlier in the year and was stimulated by a December 2002 report from the European Commission on 'adequate and sustainable national pensions' (EU0301206F)

Prospects for the pension system

The report from the Commission does not agree with long-term Spanish forecasts on pensions expenditure (see table 3 below). The population over the age of 65 is predicted to increase in Spain from the current 6.5 million to 11 million in 2050 - see table 1 below. In 2050, it is calculated that the number of over-65s will be about 50% of the number of people of working age (according to estimates by the research department of Banco Bilbao Vizcaya Argentaria, BBVA). The overall demographic development also does not seem to be very optimistic, with Spain's current 40 million inhabitants predicted to fall to about 34 million in 2050.

Table 1. Population, employment, economic and social security prospects of the EU
. Current % of population aged 65 or over % of population aged 65 or over in 2050 Forecast % annual employment growth in 2003 Unemployment as % of the active population in 2003 Forecast % economic growth in 2003 GDP per inhabitant in USD Social benefits as % of GDP
Austria 25.1 55.0 0.0 4.5 1.2 23,310 28
Belgium 28.1 49.7 -0.1 7.3 1.2 22,110 28
Denmark 24.1 41.9 -0.3 5.0 1.5 30,420 30
France 19.4 50.8 9.1 9.2 1.1 21,980 31
Finland 24.5 48.1 -0.2 9.4 2.2 23,460 27
Germany 26.0 53.3 -0.8 8.9 0.4 22,800 29
Greece 28.3 58.7 -0.3 9.5 3.6 10,670 25
Ireland 28.8 44.2 0.4 5.6 3.3 24,740 16
Italy 23.4 66.8 0.4 9.1 1.0 18,620 25
Luxembourg 21.9 41.8 1.1 3.3 1.1 43,090 24
Netherlands 25.1 44.9 -0.4 4.2 0.5 22,910 29
Portugal 25.1 48.7 -0.2 6.5 9.5 10,500 23
Spain 27.2 65.7 1.0 11.6 2.0 14,150 22
Sweden - 46.1 -0.3 5.3 1.4 25,630 33
UK - 46.1 0.5 5.1 2.2 23,680 27
EU 26.7 53.4 -0.1 8.0 1.3 - 28

Source: Eurostat, European Commission, World Bank and The Economist, drawn up by Gabriela Cañas, published in El País on 11 May 2003.

If the problem of the low level of economic activity is not solved - through the integration of women in the labour market, the arrival of new immigrants and an increase in the birth rate - retired people will represent 32.5% of all citizens in 2050. Therefore, it is claimed, the relation between active and passive workers will become unsustainable, particularly given the increase in life expectancy - see table 2 below.

Table 2. Life expectancy in years at birth, Spain, 1980-2005
. 1980 1990 1995 2000 2005 (forecast)
Women 78.6 80.5 81.5 81.9 82.5
Men 72.5 73.4 74.4 74.1 74.8

Source: Ministry of Labour.

This forecast increase in the number of pensioners would raise expenditure on pensions above 15% of Gross Domestic Product (GDP) by 2040 - see table 3 below. The European Commission experts consider that increasing expenditure above 15% or 18% would be unsustainable for any pension system.

Table 3. Forecast Spanish expenditure on pensions in % of GDP, 2000-50
Source 2000 2005 2010 2020 2030 2040 2050
European Commission 9.4 9.2 9.3 10.2 12.9 16.3 17.7
Ministry of Labour 8.43 7.98 8.03 8.56 9.92 12.06 .

Source: Ministry of Labour.

Other studies carried out by the research service of the Bank of Spain (Banco de España), BBVA, the Caixa de Pensiones and FEDEA have repeated the need to make reforms. The reports by these organisations calculate that expenditure on pensions will increase from the current 9.4% of GDP to 17.7% in 2050 and will be the highest in the EU. They thus agree with the forecasts for the development of expenditure made by the European Commission (see table 3 above).

The problems of sustaining the pension system will begin earlier, in 2015, from which date there will be a major influx of retired persons who were born in the late 1960s and early 1970s - see table 4 below. This problem will become more acute as of 2030. However, if the objectives agreed at the Lisbon European Council summit in March 2000 (EU0004241F) are met and full employment is achieved in 2010, the impact on pensions expenditure will be lower.

Table 4. Forecast number of pensions awarded in Spain, 2000-40
Year Retirement Permanent disability Death and widowhood Total
2000 4,526,684 790,304 2,332,404 7,649,392
2005 4,632,688 850,996 2,497,097 7,980,781
2010 4,887,048 947,621 2,640,897 8,475,566
2015 5,279,319 1,027,230 2,782,211 9,088,760
2020 5,712,874 1,082,850 2,908,028 9,703,752
2030 7,012,373 1,023,971 3,118,866 11,155,210
2040 8,248,298 865,437 3,440,516 12,554,251

Source: Ministry of Labour.

Revision of the Toledo pact

The European Commission calls for a revision of the Toledo pact, in which the signatories agreed periodically to revise the viability of the pensions system and to make any necessary adjustments. The spokesperson of the governing People’s Party (Partido Popular, PP) on the commission overseeing the Toledo pact considers that the revision should be ambitious. The aims of the PP include the idea of improving the social protection of certain groups and clarifying the involvement of immigrants in the pension system with regard to both rights and contributions. Above all, however, the central issue is that 'we must reduce expenditure and increase income'. The PP's main proposed lines of action are as follows.

  • Increasing the period of contributions. This issue is taking on increasing importance in the debate (ES0303104N) and involves the correspondence of pensions to the contributions paid, which would possibly involve an increase in the number of years of contributions used as a basis for calculating pensions. In 1985, the Socialist government of the time increased the period of employment on which pensions are calculated from two to eight years. In 1997, the PP government and the trade unions agreed progressively to extend the calculation period from eight to 15 years (ES9710220F). The tendency seems towards calculating pensions on the basis of the individual's whole working life. This idea has been proposed by political parties and in the pensions agreements signed in 2001 by the PP, the Spanish Confederation of Employers’ Organisations (Confederación Española de Organizaciones Empresariales, CEOE) and the Trade Union Confederation of Workers’ Commissions (Comisiones Obreras, CC.OO) (ES0106244F). The General Workers’ Confederation (Unión General de Trabajadores, UGT) did not sign this accord (ES0106244F). There is a similar tendency in other EU Member States. In France, for instance, the government's current pensions reform (FR0305103F) means that workers will need 40 years of contributions as of 2008 and 42 years as of 2020.
  • Private pension schemes. The PP wants to promote private pension plans as a complement to the public pension system. These plans have been developed little in Spain and their degree of profitability in recent years has been low. Looking elsewhere in the EU, in Italy, for example, the government is planning to provide incentives for private occupational pension schemes and pension funds, in addition to paying end-of-service allowances (a portion of a worker's pay obligatorily set aside by the employer and then paid as a lump sum at the end of the employment relationship) into a supplementary pension fund (IT0305102N).
  • Increasing the number of contributors. The revision of the Toledo pact will broach the subject of increasing pensions revenue, which may affect above all the special system for self-employed workers (ES0304106F), bringing their contributions into line with those paid by wage-earners to the general system. Furthermore, an increase in the number of contributors may be stimulated through an increase in the labour market participation rate of women, currently (at 42.3%) one of the lowest in Europe. It is hoped that this group, together with immigrants, will compensate for the progressive ageing of the Spanish population. In the last few years a major growth in immigration has led to an increase in the number of contributors to the social security system (ES0304205F). In the past two years, at least a quarter of new contributors have been foreign. In 2000 the number of immigrants arriving in Spain stood at 360,000. The government, however, calculates that as of 2005 the number will stabilise at around 160,000 people.
  • Limiting pre-retirement. The PP wants to limit pre-retirement in large companies before the age of 60 (ES0204206F). At present in Spain there are 1.2 million persons who have retired early either voluntarily or involuntarily.
  • Later retirement. The PP aims to introduce incentives for later retirement, even beyond the legal age of 65, in order to attenuate the impact of increasing life expectancy. At present the average retirement age is 63. Other EU Member States also seem to be following this tendency. There are calls in Germany to raise the legal retirement age from 65 to 67 (DE0305104F), while France plans to provide incentives for persons who agree to continue working until the age of 65.
  • Pensions supplements. As has been debated for some time, there is a proposal that social security contributions should be used to fund contributory pensions (those that a worker receives after making social security contributions) and that non-contributory benefits should be funded through taxation. At present, the minimum supplements which bring the pensions of those who have not contributed sufficiently are still partly paid for by contributions (ES9902201N).

Commentary

The forecasts made in recent years show that projections for periods of over 25 years involve a high margin of error. Even the former minister of labour, Juan Carlos Aparicio, who was one of the authors of the Toledo pact, believes that calculations in this area are 'escatológico' ('scatological/eschatological')- ie both ethereal and filthy. The most accurate forecasts and projections are those made by the social security experts, regardless of what party is in office.

Furthermore, the Spanish trade unions believe that the reform of pensions that the European Commission and the Spanish government wish to promote forms part of a policy of 'competitive cuts' in social security. This issue was also discussed at the congress of the European Trade Union Confederation (ETUC), held in May 2003 in Prague (EU0306207F). One of the central issues for ETUC is the defence of the 'European social model' during the extension of the EU and the accession in 2004 of 10 new countries with lower levels of social protection and welfare. (Antonio Martín Artiles, QUIT-UAB Group).

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