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

Reforms with hesitant pace

Fri, 28 Jan 2011 15:13:14 +0000 Published in Navarra Newspaper

With the reform of the pension system, the Government is pursuing two closely related objectives. Firstly, in the immediate term, it intends to send a message of firmness that will strengthen the international credibility of our economic policy, in order to make access to the financing that we continue to need cheaper. Secondly, in the longer term deadline, it seeks to consolidate the financial viability of pensions in their current pay-as-you-go system model . If the markets interpret the measures implemented as achieving this second goal, the first should automatically follow. Then, the question core topic is whether, thanks to this reform, we have a more solid pension system.

As readers will know after months of discussion, the Spanish system follows a pay-as-you-go outline , where the contributions of current workers cover the pensions received by retirees. The problem we face in the medium term deadline is demographic. The falling birth rate and increasing life expectancy will overturn the population pyramid, with an increasing percentage of Spaniards over 65 years of age. There will thus be fewer contributors per pensioner, complicating the financing of the system.

The measures announced relax this tension between expenses and income. An extension of working life increases the number of years contributed by each person and reduces the period during which they receive their pension. Delaying the retirement age also means that each year there will be more contributors and fewer potential beneficiaries. On the other hand, extending the period of computation of the years of contribution required to qualify for the maximum pension allows a better match between the amount contributed and the amount received by each worker.

These measures are a timid step in the right direction, but they will be of little use if other reforms are not undertaken with a real will for change -such as labor or Education- that will allow our Economics to grow and create a productive employment . The real problem is the unbearable waste of the factor work and of human capital, especially that of young people. Because any pension system is more difficult to sustain with high unemployment fees , low activity fees -as among women forced to choose between work and family life-, and poor productivity results of work. The fact that 2010 was the first year in which the contributions of companies and workers did not cover expense in contributory pensions is a clear alarm signal, which should shake our economic policy out of its dangerous complacency in subject of reforms.