Reforming Spain’s pension system: Focus on financial sustainability

Reforming Spain’s pension system: Focus on financial sustainability

Fecha: 2013
Spanish and International Economic & Financial Outlook, SEFO, V. 2 N.º 4

Sumario

The Spanish economy: The end of the recession is in sight, but the recovery will be slow
  • The international economic situation remains fragile in both developed and emerging markets. The United States continues to grow and create jobs, albeit at a modest rate, while a more restrictive fiscal and monetary policy stance are causing concern regarding spillover effects for the global economy.The Euro area is still in recession, although with a trend towards stabilization, and financial markets remain fragmented. Emerging markets have lost momentum, with lower potential growth in China raising concerns about the performance of export-led growth economies. In Spain, the economy is bottoming out and is set to start to show positive growth rates as of the last quarter of this year. Domestic demand continues to be weak and some imbalances built-up over the crisis period have yet to be corrected. Exports will be the main growth driver, but their capacity is limited, which translates into a slow recovery.
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Pension reform in Spain: Introducing the sustainability factor
  • This article examines the various reforms of the Spanish social security public pension system since its massive overhaul in the 1960s. Of the multitude of reforms undertaken to date, the 2011 reform was, by far, the most rigorous, but will still only preventing one third of the severe deterioration of system accounts projected to occur by 2050. However, the 2011 reform does contain one element that has the potential to stabilize the system- the sustainability factor. On the basis of the policy options recommended by the Experts Committee in its June report, this factor could achieve the full sustainability of the pension system in the long term. Nevertheless, its introduction would pose serious questions for pre-existing supplementary and/or replacement pension schemes.
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The European banking union from the Spanish perspective: Myths and reality
  • The European banking union project has drawn a significant amount of recent attention. However, despite the inevitable trade-off between the time needed to establish it and the quality of the union, progress on implementation remains limited given the lack of political consensus. Additionally, certain design aspects, in particular related to the Single Resolution Mechanism (SRM), fall below expectations. Market fragmentation is still high and in part attributable to government policies across the EU. Empirical results suggest that government implicit support to the banks –the so-called implicit guarantees– can be twice or three times larger in countries such as Austria or Germany than in Spain, Italy or Portugal. Evidence shows a 1% increase in the implicit guarantee (resulting in lower funding costs for banks) is passed on in the form of a 0.52% lower interest rate applied to firms for bank loans. Thus, a strong banking union would not only benefit peripheral countries engaged in recapitalization and restructuring efforts, but also the Euro zone as a whole.
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Banking sector competition and prudential regulation
  • Evidence has shown a positive link between increased competition and increased risk taking behavior in the financial sector. Although this subject has been analyzed on many occasions, it generates renewed interest whenever a country, or group of countries, faces a banking crisis, given the large costs for economic growth and public accounts associated to such crises. As highlighted in a recent working paper published by the International Monetary Fund (IMF) this past May2, prudential regulation is and should be and important element for banking sector competition policy. Several studies have quantified the costs of banking crises and the benefits of prudential regulation in preventing or reducing the financial burden, as well as the recurrence of crises themselves. In this context, we examine banking competition and prudential regulation in Spain – a country in the process of overcoming the most serious banking crisis in its recent history. Spain must address several of the traditional challenges related to banking competition, such as: i) an intense concentration process; ii) the role of the public sector in nationalized banks; and, iii) the desirability of placing limits on certain types of deposit remuneration, among other issues.
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Impact of changes in Spain’s VAT rates during the economic crisis: A comparative analysis
  • The VAT reforms in 2010 and 2012 raised Spain’s reduced and standard rates by 3 and 5 percentage points, respectively. Although these measures are in line with trends elsewhere in the European Union, they put Spain in the group of EU-27 countries (along with Hungary, Romania, Latvia, the Czech Republic and Estonia) in which VAT rates have risen furthest during the economic crisis. One of the direct consequences for Spain is that it has gone from having one of the lowest standard rates in the EU (along with Luxembourg) to now having a rate that is near the average. The tax rates applicable to certain representative items in households’ shopping baskets (such as food, books, or medicines) are nevertheless lower in Spain than in its peers. However, this is not so in the case of other items which have a significant weight in the Spanish economy, such as the hotel and catering industry, where the rates are similar to those in neighbouring countries. In this context, the review of some of the goods subject to lower rates is an option to consider, although this would not solve the problem of a low VAT collection ratio and could make the tax regressive.
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The outlook for the Spanish economy in the medium term
  • In this Special Feature, the author provides us with a medium term scenario for the Spanish economy in the context of the prospects for euro area economic performance and integration. Under his base case scenario of continued, slow progress towards euro area banking and fiscal union, the Spanish economy will continue correcting its accumulated imbalances and show improvement in key macroeconomic and fiscal/debt indicators over the coming years. In this article, the author presents us with 12 key factors for consideration as regards the medium term outlook for the Spanish economy, supported by the latest forecasts published by the International Monetary Fund (IMF) and the European Commission (EC). Findings show that Spain will face key challenges related to the housing market adjustment, public and private debt sustainability, and employment creation. On this last point, the author provides some recommendations for boosting Spanish employment. Ultimately, the assumption is that in the absence of an unexpected shock in Spain, or at the EU level, Spain’s difficulties should be tackled through an improved macroeconomic climate and the implementation of appropriate structural reforms over time.
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