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Joblessness will push Spanish pensions into crisis

The startlingly rapid fall in employment in Spain and soaring joblessness are pushing the country toward a new crisis: the insolvency of its pension funds.

Demographic trends and high unemployment even in times of expansion have been eroding the solvency of the public pension system in Spain for some time, despite the country´s fast growth and balanced budgets. Low birth rates and rising longevity had left Spain with an old-age dependency ratio of 27% by the year 2000. (The old-age dependency ratio is calculated by dividing the number of persons 65 years and older by those aged between 20 and 64.) The situation was further aggravated by Spain´s relatively low employment rates: only 66% of those who are in working age have a job, compared to 69% in Germany, 72% in the United States and the United Kingdom, and more than 75% in the Nordic countries.

As a result, in Spain the number of working people divided by the number of retirees (population 65 and over) was only 2.28 at the end of 2008. But with job destruction in Spain proceeding at a pace that is almost unprecedented in OECD history, the ratio had already dropped to only 2.23 in January, as 350,000 jobs vanished. If employment continues to plummet at this rate, the ratio would be only 1.74 by the end of 2009. This would mean that there would be fewer than two persons working to pay each pensioner in Spain. To keep the system afloat, either tax rates would have to rise steeply –a measure that would push Spain even more deeply into recession—or pensions would have to be cut dramatically, which would also cause further contraction of consumption.

Without a major recovery in employment, the surplus reserved for the pensions system will quickly evaporate and Spain will begin to borrow to pay pensions.