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José Luis Álvarez, Professor of Economics and Business Administration, University of Navarra, Spain School

Pensions: a necessary and urgent discussion

Mon, 08 Feb 2010 09:57:21 +0000 Published in El Economista (Madrid)

Few economic news could have caused the commotion generated by the government's proposal pension reform. However, beyond all the errors of form and substance that have accompanied it, I believe that the publication of the project opens a good opportunity for a constructive discussion about the future of pensions. A discussion long postponed, not because of the absence of ideas and proposals (at a glance, and I am leaving many out, I remember those launched by the Bank of Spain, the BBVA's programs of study Service, the Businessmen's Circle,...), but because of the political stubbornness in dogmatically defending the economic viability of a model that, in its current conditions, seems unsustainable in the medium and long term deadline.

Our public pension system is a pay-as-you-go system, in which the contributions of those who work cover the pension of those who are retired. This system works well under demographic conditions similar to those of its historical beginnings. That is, a population pyramid with a broad base of young people, which supports the rest of the pyramid, narrower as one moves up in age. Likewise, it works well with high fees activity and low fees unemployment, because then more potential workers are effective contributors. Its results are also better if the production generated by these workers grows at a good rate and in a sustained manner over time, because in this way there is more to be distributed.

Do these ideal conditions exist in Spain in 2010? Unfortunately, no. Almost at the same time as the government's plan came out, the INE published its latest long-term population projections for Spain deadline. If you take a look at the projected population pyramids, you will not see pyramids, but something similar to strange jars in which the widest part moves upwards as the forecast time horizon becomes more distant. Translated into figures, if today we have 2 people over 64 years of age for every 10 people of working age, in 40 years that proportion could increase to 6 for every 10. The increase in life expectancy, which is excellent news in itself, is another factor of demographic pressure on the system, by lengthening the period for receiving a pension. Nor does the economic status invite optimism. Our unemployment rate is close to 20% and it seems a long way off when we will be able to recover fees growth capable of creating employment at the desirable rate. Productivity, for its part, has been stagnant for a long time.

A question of trust and credibility

We are facing the economic problem par excellence: the scarcity of resources. In a few years, the pension system will lack sufficient resources to meet its obligations. To face this problem, the system's capacity to obtain resources can be increased. Or we can reduce the expense in pensions. It is also possible to increase efficiency in the use of resources, fundamentally with capitalization schemes that make it possible to obtain a return on contributions. In turn, these alternatives can be implemented with mere changes in the parameters of the current system, or with a structural reform that adds elements of the capitalization systems to some Degree or that promotes private pensions as a complement to public pensions.

The range of possibilities is very wide, although a comprehensive approach is needed because isolated parametric measures, such as extending working life, will not suffice. We also have the experience of countries that have already carried out pension reforms. But the time for action is running out. We must get down to work. report First and foremost, it is essential to provide society with rigorous and transparent information on status and the options available. From there, a courageous discussion must be considered, leading to the adoption of concrete measures capable of giving confidence to citizens and credibility to our economic policy. If this is not done, we run the risk of paying a very high price in the not too distant future.