PENSIONS IN SPAIN A SUSTAINABLE AND REAL PROPOSAL OF REFORM NOVEMBER 2020 Spain, Italy & Portugal 1 Pensions in Spain: a Sustainable and Real Proposal of Reform 2 Pensions in Spain: a Sustainable and Real Proposal of Reform About Friedrich Naumann Foundation for Freedom Created more than 60 years ago by the first president of the Federal Republic of Germany, Theodor Heuss, the Friedrich Naumann Foundation for Freedom has chosen Spain as the headquarters for southern Europe to continue developing the promotion of liberal principles and political education. The entity seeks to strengthen cooperation and political dialogue between representatives of political parties, scientific institutions and civil society organizations from Spain, Italy, Portugal, Germany and the European Union, as well as to develop a completely new approach to interregional cooperation in the Mediterranean. About Fundación Civismo Fundación Civismo is a Spanish think tank that works in defence of personal freedom, under the principles of classical liberalism. Through its research work, it evaluates the effects of economic and social policies, commu- nicating them to the public opinion and proposing alternatives. It, thus, promotes an active civil society, which is involved in the design of public policies, so that citizens can exercise their individual freedom, thereby con- tributing to collective prosperity. About Instituto Juan de Mariana The Juan de Mariana Institute is an independent Spanish institution dedicated to the investigation of public affairs. Its objective is to become a beacon of the debate of ideas and public policies, focused on a free society. To get closer to this goal, it sets up training plans, opens and deepens lines of research in a multidisciplinary way, and carries out efforts of divulgation and news analysis. 3 Pensions in Spain: a Sustainable and Real Proposal of Reform 4 Pensions in Spain: a Sustainable and Real Proposal of Reform PENSIONS IN SPAIN A SUSTAINABLE AND REAL PROPOSAL OF REFORM Francisco Coll, Domingo Soriano, José Francisco López November 2020 5 Pensions in Spain: a Sustainable and Real Proposal of Reform 6 Pensions in Spain: a Sustainable and Real Proposal of Reform Francisco Coll He holds a Bsc in Economics from the National Distan- ce Education University (UNED) and a MBA from ENAE Business School, as well as a masters in financial markets from EUDE Business School and a masters in project ma- nagement from the Camilo José Cela University and IMF Business School. Finally, he also holds a masters in finan- cial management from the University of Barcelona and EAE Business School. He is an international economic analyst; regional director of the HAC Business School of New York. He collabo- rates with over 30 newspapers and televisions. Among others, he writes periodically for the The Washington Post, Forbes, BBC, CNN and The Huffington Post. He is also an analyst for the World Economic Forum (WEF). Domingo Soriano Degree in Law and Business Administration and Manage- ment from the Carlos III University of Madrid. After three years working at IBM, he decided to change course in his professional career and enrolled in Master of Journalism from El Mundo, which he completed as number 1 in the 2006-07 class. In this newspaper, he worked as an editor in the Nacio- nal section in 2007, and later in the Economy section be- tween 2008 and 2009. Since 2010, he has been editor of Libre Mercado. José Francisco López Chief editor at Economipedia. He holds a Bsc in Econo- mics from the University of Murcia and he is an expert in financial markets. He holds a masters in project manage- ment from the Camilo José Cela University and IMF. He also collaborates with a number of regional media outlets such as Onda Regional or Capital Radio. His main interest is to foster financial education in Spanish spea- king countries. 7 Pensions in Spain: a Sustainable and Real Proposal of Reform 8 Pensions in Spain: a Sustainable and Real Proposal of Reform CONTENTS Foreword 11 Introduction 13 1) The Large Numbers 17 1.1. Public Spending on Pensions 17 1.2. Demographics and Labour Market 18 2) Pensions Systems – Compared Analysis. Spain, Italy, Portugal 21 2.1. Structure of the pension system in Spain, Italy and Portugal 21 2.2. Relationship between Dependency Rate and Pension Spending (GDP%) 22 2.3. Replacement Ratio 23 3) Options 25 I. Retirement Age 25 II. Active Population – Immigration and Employment Rate 27 III. Average pension – Calculation Period for the Base 29 IV. Wages and Productivity 31 V. Social Contributions 34 VI. Transfers from Central Administration 35 4) Proposals 37 4.1. Reforms in the Social Security System 38 4.2. Reforms to Foster Savings 43 4.3. Reconfiguration of Social Security accounts 46 References 49 Contact 51 9 Pensions in Spain: a Sustainable and Real Proposal of Reform 10 Pensions in Spain: a Sustainable and Real Proposal of Reform FOREWORD Pensioners in most developed countries depend, at intergenerational justice, on many occasions, is left least in part, on public pension systems. Systems that out of that equation. are facing big problems. Aged societies suppose, for obvious reasons, a burden for any pension model The current situation of young people in Spain, who, based on the transfer of payment from the emplo- due to the consequences of covid-19, suffer the se- yed population to retirees. It is precisely because of cond economic and existential crisis in the course of demographics itself that older voters constitute a a decade, must be considered from a much broader powerful electoral force and no political party can perspective than in the past. For example, acquiring afford to drive them away, by announcing overly am- a private home (one of the most effective barriers to bitious reform plans, which would almost certainly poverty in Spain) has been, by far, much more feasi- contain ‘necessary cruelties’ for current pensioners. ble for previous generations. However, once the sustainability of a pension system This brings us to a final point. As representatives of is at stake, what the legislator has to do, in an exerci- Spanish and German institutions, we have decided se of responsibility, is to seek and promote solutions to jointly work on this problem, because the challen- that imply establishing a fair commitment with the ges are very similar in both countries and we should current pensioners and with the workers. This study learn from each other. While the complement of pri- responds to the attempt to create a feeling of urgen- vate retirement plans is more common in Germany, cy, and to contribute to the brainteaser of a prepa- Spanish home ownership rates are admirable from a red-for-the-future pension system. German point of view. Future editions of this study will analyse Italy and Portugal in greater depth. And A fair commitment also requires a balanced view it is that, from now on, we are committed to keeping of what ‘social justice’ means. In most developed this so important (but unpopular) area of public po- societies, the political debate on this concept re- licy among our priorities, and to contributing to the volves around tax rates, unemployment bene- creation of a pan-European dialogue around it. fits or the amount of pensions. On the contrary, Irune Ariño, Deputy Director of the Instituto Juan de Mariana. David Henneberger, Director for Spain, Italy, Portugal and Mediterranean Dialogue of the Friedrich Naumann Foundation for Freedom Juan Ángel Soto, Director of Fundación Civismo. 11 Pensions in Spain: a Sustainable and Real Proposal of Reform 12 Pensions in Spain: a Sustainable and Real Proposal of Reform INTRODUCTION There is no reform more urgent and necessary than both public pensions and those that refer to the that of pensions. And, at the same time, none that number of retirees or the amount of their benefits. generates more controversy, fear or tension. We For this reason, the macroeconomic imbalances that all know that something has to be done; but, at the the country presents also alert us to the possibility same time, the temptation pushes us to delay the that, in a non-so-distant future, this system will be- task, to let someone else take care of the problem, come unsustainable from a financial point of view. not to get into that mess, to look to other way. The public pension system is protected by the Span- ish Constitution. Article 41: In a sense, it makes sense for politicians to think like this: any change in the pension system will become “The public authorities will maintain a public Social a headache for the proponent. There will be winners Security scheme for all citizens, which guarantees as- (few) and losers (most), because the current model sistance and sufficient social benefits in situations of is unsustainable without adjustments. If the bases need, especially in the event of unemployment. Sup- of the system are to be changed, inertias, vested in- plementary assistance and benefits shall be optional”. terests and previous obligations already contracted will complicate the attempt. If the adjustments occur To finance this right, and unlike other countries in within the present model, reality will also overwhelm which workers supplement the public contribution us: the current level of generosity enjoyed by Span- with private savings systems, in Spain we opted for ish retirees is impossible to maintain in the medium what we could call a pure and contributory distribu- term (whether we measure it in terms of ‘first pen- tion model: the public system is nourished by the sion / last salary’ or in the ratio ‘average pension / contributions made by all workers in the country average salary’). through their contributions. For this reason, the financial balance of Social Se- And, in theory, these contributions will determine curity worries inside and outside our borders.