Report Nº: 77023/08/2018
The growth of pension spending is the main factor of destabilization of public finances. Trying to lower the fiscal deficit without reforming the rules of the pension system is financially unsustainable and socially unfair because it implies continuing to preserve privileged treatments and double coverage. Retirements and pensions are the main component of national public […]
Retirements and pensions are the main component of national public expenditure. They represent approximately 40% of the total public expenditure. More importantly, it grows at a substantially higher rate than the rest of the expenses and revenues. For example, so far this year, the payment to retirees increased at a rate of 30% year-on-year when the tax resources did so at 22%. This dynamic makes the pension system the main destabilizing factor of public finances.
This accelerated expansion of pension spending not only explains the unsustainable level of fiscal deficit, but also limits and curtails other State activities. Even in other components of the social protection system. For example, spending on family allowances –which is second in importance after retirement benefits within social transfers– has been growing at a rate of 22% year-on-year, that is, more in line with the evolution of tax resources than with the pension expenditure.
What are the social consequences of pension spending being so high and with such an expansive growth?To shed light on this question it may be useful to observe the difference in the poverty rate according to age groups. In this regard, with the INDEC household survey corresponding to the 1st quarter of 2018 it can be estimated that:
These data show that children and the young suffer five times more poverty than the elderly. This gap is associated with the fact that the pension policy applied in the last decade was effective in reducing poverty among the elderly but, due to its rudimentary design, it did so at the expense of the rest of the population and, especially, of the children and the young. The accelerated growth of social security spending obliges to sacrifice other social benefits with a high impact on children and the young (such as family allowances) and to apply very poor quality taxes (including inflation) that reduce job creation. Thus, pension spending ends up making an important contribution to the regressive distribution of income.
Allowing pension expenses to continue with this dynamic is not only a factor of macroeconomic destabilization but also deepens inequality and social exclusion. Furthermore, in a long-term perspective, it erodes the sustainability of the pension system itself. Children and the young who today suffer from poverty are not developing appropriate work habilities to be the future funder of the system. If at present only one third of the employed have a paid job registered in the private sector –ie, it is a genuine funder of the pension system– with the current trend in the future that proportion will tend to worsen.
Are there margins to moderate the growth of pension spending without increasing poverty among older adults?The answer is affirmative, to the extent that there is willingness to eliminate pension rules that generate privileges and squander money. In simplified terms, three areas must be addressed: a) aim at the homogeneityof the pension rules by eliminating special and differential regimes that allow access to retirement at a younger age, less contributions and/or higher benefits than the general regime; b) establish that the benefit adjustmentrule for people with double benefits applies only to one of the benefits; and c) review the rules of access to pension for survivalin order to begin the reversion of the massive phenomenon of double coverage.
The social security policy of the last decade was characterized by opportunism and irresponsibility.The most damaging and enduring of its consequences is that it shut the fiscal spaces to better assist the 4 out of 10 children and young living in poverty. It is a present drama and a heavy social debt for the future. For this reason, the pension reform is necessary for the ordering of the public finances and essential to generate fiscal spaces for poverty to be addressed appropriately among children and the young.