REFORMING THE SOCIAL SECURITY SYSTEM IN SPAIN

The public pension system in Spain administered by the social security administration (Instituto Nacional de la Seguridad Social or INSS) is one of the pillars of the social protection system. The system is currently a PAYGO scheme that has come under increased financial pressure as a result of three trends that have affected several countries – especially in Europe:

1. Increased generosity – Politicians have increased pensions in real terms for those segments of society in greater need. Furthermore, the pension system has sometimes been used as an electoral weapon.

2. Deterioration in the labor markets – The increase in unemployment during the 1980s and 1990s has eroded the payroll tax base below its theoretical potential.

3. Demographic changes – An increase in life expectancy, combined with a dramatic decline in fertility rates since 1975, has raised the old age dependency ratios. Projections suggest further increases in this ratio. To maintain pension commitments, all else being equal, there will be greater fiscal pressure on the existing wage base.

The future of the Spanish public pension system has spurred many debates and prompted many proposals for reform in recent years. The agreements of the Pacto de Toledo (1995) that led to several positive reforms in the system have been particularly important. The economic expansion in the second half of the 1990s, and from 2000 to 2003, created small surpluses for the Spanish public pension system and, in some circles, a potentially false sense of security of its financial viability.