The pension counter-reform makes the patient worse

“My bread keeps landing jam side down.” Francis Rossy.

Raising social contributions does not solve any of the problems of Social Security. Misleading citizens by saying that “the majority is run by the company” is unacceptable. The entire gross cost of a payroll is salary. The higher the labor tax, it is more expensive to hire and supposes lower net salary for the worker.

No, raising the social contribution -the tax on work- is not “deferred salary”. It does not go to your account, you are not going to receive more pension but less, and they are going to retire you later.

the minister himself Escrivá said it clearly before occupying his briefcase. In a document called The sustainability of Social Security, opinion of AIReF to the Government (Palencia, April 5, 2019) stated: “Social contributions in Spain are relatively high, standing at six points above the OECD average” and “it is considered that any modification should not imply an increase in social security contributions, but only a reconfiguration of them”.

The economic literature on the rise in social security contributions is unequivocal, from the Bank of Spain to Funcas and, of course, the AIReF, has warned on many occasions of the detrimental effect on employment.

According to Eurostat, Spain is above the European Union average and is one of the three countries where companies pay more for hiring and labor taxes. Spain, together with France, is the country where the social contributions paid by employers for a salary represent a greater weight (more than 35%) in the numerator of the fiscal pressure.

Now Escrivá says that if you add the contributions to the salary, the cost is low. Sure, because he doesn’t pay for it. He further impresses that it does not take into account relative business size, adjusted cost of living, productivity and other taxes. Well, he doesn’t impress, he knows it.

The problem with Social Security is not income, much less low taxes.

The Income from social security contributions has registered a record historical year after year since 2017. In fact, Social Security revenues only fell, and moderately considering the unemployment disaster, between 2008 and 2013. Since the 2012 Labor Reform, Social Security revenues have stabilized first and reached a historical record. In 2021, revenues of more than 157,000 million euros are estimated after reaching more than 152,000 million in 2020.

Since the Labor Reform of 2012, Social Security income has stabilized first and reached a historical record

The study of Lopez-Rodriguez Y Garcia Ciria of the Bank of Spain, Tax Structure of Spain in the context of the European Unionhighlights the following about Spain: The “weight of social contributions on GDP is higher than the average” of the European Union.

They added that “the average tax wedge, measured as the quotient between the sum of personal income taxes derived from work income and social contributions, on the one hand, and the average gross salary of full-time employees in the sector private, on the other is situated in Spain above the average of all the OECD economies for all income brackets and types of individuals according to their family situation”.

The problem of Social Security is threefold: demographic pyramid, high unemployment with high underground economy and business size.

demographic problem

The demographic pyramid Spain is a big financial problem that can be solved, but not by increasing taxes. The Spanish population is stagnant at 47.3 million and longevity is a determining factor. Almost 20% of the population is 65 or older, 30% is between 45 and 64.

The narrowing of the base of the demographic pyramid and the widening of the peak means that a pay-as-you-go system, such as the Spanish one, suffers significant tensions that cannot be solved with tax increases for those who work and can have children. It is a clear error of economic incidence that endangers the long-term sustainability of the system.

The economic problem

Indeed, what has happened is that spending has skyrocketed by more than 70,000 million for the incorporation of new retirees and the revaluation of pensions.

Spain has 1.2 million more pensioners than in 2010, when the number of affiliates was 17.6 million. Today, the number of effective affiliates (excluding ERTE and self-employed in cessation of activity) is 19.4 million.

The average pension has been revalued by 34% and spending on pensions is 41% higher. Pension spending is growing at 3% per year, more than real GDP and the median employment rate.

No amount of tax increases would have covered the hole created by the sharp rise in the number of retirees and monthly spending. Anyone who believes that an extra $70 billion a year would have been raised by raising taxes in the midst of a crisis and fragile recovery simply has problems with the math and statistics.

the labor problem

Spain has the second highest unemployment rate in the European Union with Greece, not coincidentally another country with extremely high social security contributions, and the highest youth unemployment rate of all. Making hiring more expensive is a massively regressive measure because it affects more the new job seekers, the youngest, and the most disadvantaged.

A large company that has high salaries can withstand a rise in social contributions, an SME or micro-enterprise cannot.

Spain is also a country of micro-enterprises. The misnamed large companies or consolidated groups are also comparatively smaller than our peers.

39% of companies in Spain are micro-companies with less than 9 employees. 56% are SMEs without employees, which will not contract with this measure. Large companies are only 0.17%. SMEs with 10 to 49 employees are less than 6%, according to data from the Ministry of Industry, Commerce and Tourism.

The problem with the Government is that it legislates as if Spain were a country of large companies and without high unemployment, imposing on micro-enterprises and SMEs the costs of a rich country with low unemployment.

The problem of the Government is that it legislates as if Spain were a country of large companies and without high unemployment

Spain also has a high rate of underground economy. The estimates for 2021 by Friedrich Schneider place the non-regularized economy at 16.9% of GDP, two points more than in 2019. But in Spain the underground economy is not a matter of evil fraudsters making a fortune, it is that the vast majority cannot emerge. Tens of thousands of small workers cannot afford high self-employment fees and sky-high taxes and late fees.

Neither the demographic problem, nor the employment problem, nor the business size problem, nor the underground economy can be solved by shooting up hiring costs. It’s like trying to stop a hemorrhage by stabbing the sick.

A pay-as-you-go system like the Spanish one can only reduce the Social Security deficit by attracting much more investment, much more employment and being a world center for creating value by attracting capital. Putting obstacles to business growth and making hiring more expensive will make Spain’s problems worse in the medium and long term.

It is even worse when someone with a serious career, before becoming a minister, as Escrivá says in parliamentary headquarters that he has calculated the income of the supposed piggy bank that he is going to create using an annual -and cumulative- return of 3%. 3% per year!

In the last decade, the 115 pension plans that invest in the stock market and have a history of more than a decade have risen, on average, 3.82%, according to Morningstar. The most profitable have focused on investing in the US, while the worst, in the Spanish market and in sovereign fixed income. The 93 plans with at least 10 years of experience that invest in fixed income have achieved a return of 1.22%.

The pension funds invested in fixed income have achieved a return of 1.22% per year in a decade, but Escrivá, the Warren Buffett of the state, is believed to generate an annual return of almost triple in his “piggy bank”.

The solution to pensions in Spain is to do the opposite of what the Sánchez government is doing. Create much more employment, strengthen business growth and attract investment more than anyone else.

With these measures, the Social Security hole will go to about 50,000 million according to the Bank of Spain and what Sánchez and Escrivá do is dig deeper.

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