Spain counts on citizens to buy into revolution for pensions
By JEANNETTE NEUMANN | Bloomberg | Published: February 20, 2021
Spain is hoping to entice people to prepare for retirement with a voluntary saving plan as it tries to wean them off relying solely on state pensions.
The aim is to set up a fund run by private investment companies by the end of the year, offering Spaniards an affordable alternative to supplement their public pension. But unlike some other countries, the system will require workers to opt in rather than being automatically enrolled.
"We think there's a group of middle- and low-income Spaniards who will be interested in a boost to their lifetime savings, which can complement their public pension," Jose Luis Escriva, the social security minister for Spain's Socialist-led government, said in an interview.
Escriva wants to enhance savings and to counterbalance dependence on the state plan, a system economists say is a challenge to fiscal sustainability. The choice to keep the pension voluntary reflects political concerns among some left-leaning lawmakers about involvement of the private sector, but the minister is hopeful it can still make a difference.
"There's enormous potential," said Escriva, an economist who previously worked at the International Monetary Fund and European Central Bank. "Right now, there's a huge reliance on the public pension." Workers need more options, he said.
Escriva's team and the Economy Ministry are setting up the framework for the new pension plan, establishing maximum commissions and tax incentives. Officials will open a bidding process soon to select one or more fund managers.
"This is simply a reform, modernizing the country," Escriva said. Collective, workplace pension plans haven't gathered much traction in part because Spanish companies are much smaller and employ fewer people on average than their European peers, he said.
The government also wants to bolster tax incentives to encourage workers not to retire early, and to revamp the system for the self-employed, aligning contributions with what they ultimately receive.
Spaniards have socked away private retirement funds equivalent to only around 13% of gross domestic product, well below the OECD's average of 80%. Most of Spain's savers are high-income workers with individual pension accounts.
To tackle that disparity, officials looked for inspiration to the U.K.'s National Employment Savings Trust, known as Nest, Escriva said. Under that scheme, more than a dozen fund managers, including Blackrock and JPMorgan, now invest on behalf of more than 9.5 million Britons.
While U.K. employees are automatically enrolled in Nest when they start a new job, with the choice of opting out, Spain's plan will be voluntary, the minister said. The system resembles that of the autonomous Basque Country in northern Spain, which has a similar plan to Britain's but also requires workers to sign up.
"It's a good idea, but if they say it's not mandatory or doesn't include at least auto-enrollment, it won't resolve anything," said Concepcion Patxot Cardoner, a University of Barcelona professor. Workers tend not to opt in to voluntary savings plans, she said.
Escriva has political limits on how far he can push things. The new plan is one of a series of hard-fought pension reforms that lawmakers agreed to last year, with some left-leaning groups reticent about proposals requiring workers to participate in a private-sector plan which they said would undermine the public system.
A previous attempt to rightsize Spain's pensions, adjusting payments based on available funds and improved life expectancy, foundered after millions of retirees took to the streets in 2018 and 2019 in protest.
But the problem that isn't going away: Escriva and other policy makers are trying to figure out how to give baby boomers the public pensions they have been counting on, while ensuring younger generations have enough long-term savings too.
That's particularly thorny in Spain, which offers one of the most generous public pensions as a percentage of lifetime earnings in the OECD, and spends around 12% of annual economic output on retirement payments. The total will reach nearly 14% of GDP in 2050, according to OECD forecasts -- in line with France, lower than Italy, but notably above the group's average.
Markedly high unemployment in Spain is another headache, hindering consistent workers' contributions to the fund. Meanwhile the coronavirus crisis has exacerbated fiscal challenges, adding pressure for even more reforms in the future.
"To make Spain's pension plan sustainable, the government needs both to raise the retirement age and cut pensions," Patxot Cardoner, the professor, said. "There's no other option."