Spanish pensions reform only skin deep

Spain has used the financial crisis to reform its pensions system, yet fears run high that the changes do not go far enough, writes Toby Lewis

“You never want a serious crisis to go to waste,” as Rahm Emanuel, the former chief of staff of the Obama administration, said in November 2008, at the nadir of the present global financial crisis. It could be argued Spain’s move to raise the basic age of retirement to one of the oldest in the Eurozone, increasing the headline age to 67 from 65, shows Spain’s leaders are thinking that way about their country’s precarious pensions situation. Yet pensions experts fear Spain’s government has not gone far enough in its alterations to the retirement system.

The reforms are part of a shift towards a more mature global approach to pensions ushered in by the financial crisis. Many countries, including the UK, France and Italy are also looking to address the apparent looming demographic pensions crisis in advanced economies. The Spanish talks stand out, for they were conducted under the impetus of jittery financial markets concerned about Spain’s fiscal position. These conditions placed pressure on the country to agree an acceptable reform to convince investors the country was addressing its problems.

Furthermore, despite the radical increase of the basic retirement age, the reforms were effectively agreed in about one month with support from business leaders, unions and the governing political party. The negotiations saw intense lobbying by senior government figures in an effort to pass the reforms including Spain’s president José Luis Rodriguez Zapatero personally looking to persuade Spain’s often fractious unions to give their backing.

The government succeeded in framing a so-called social pact, which was designed to precede a parliamentary move by the government to bring the reforms into law.

The reform is expected to go before Parliament within weeks. This may mean the reforms are altered as Spain’s main opposition party, the Popular Party, decided not to sign the pact. They expressed reservations about the obligatory extension of the retirement age and stated their view that such a move should be voluntary. Spain’s ministry of work, which is conducting the reforms on behalf of the government, and the Popular Party did not respond to requests for comment.

A sense of optimisim
Hopes are high among the government the reforms will lead to significant cuts in the burden on the country’s pensions system. The Spanish vice president Elena Salgado estimated in February the reforms would lead to Spain saving 3.5% of gross domestic product by 2050, according to Spanish newspaper El Pais.

Ignacio Corchuelo, a pensions partner at Spanish law firm Garrigues, said: “A reform of the pension system was necessary either now or in the future. Spain’s economic crisis accelerated the reform and thanks to this situation, business, unions and government were able to reach agreement.”

Many pensions experts believe that Spain used the crisis to come clean about its looming pensions crisis. Towers Watson’s deputy practice leader, Jaime Nieto-Marquez, said: “No politician recognised before the crisis that there was a pensions problem, as this was regarded as politically unacceptable to say. It was only when the markets reacted an excuse was found to change the system.”

Professionals in Spain hope the swift drafting of this radical reform will increase the country’s standing in international markets. Corchuelo said: “All countries are looking into this type of reform. It was very important for Spain and it boosts confidence in the country. It was negotiated in one month and there was no social conflict like we saw in France. Everything was very peaceful.”

Missed opportunity
Yet many pension experts fear the reforms have not gone far enough and the present proposals may have wasted a true opportunity to reform the system. Javier Díaz Giménez, a professor at Spanish business school IESE, who writes regular papers about Spanish pensions, said the reason why Spain’s unions had accepted the agreement so quickly was because the reforms did not fundamentally change what workers receive.

Díaz Giménez said: “These reforms are timid and do not upset anybody. You might be thinking what’s wrong with these unions. Are they weak? There is nothing wrong with the unions. The reforms are like Kournikova [the famously beautiful tennis player]. They look good and they play bad.“