67 'til I die

On a day of gloomy news related to the Spanish labor market, a proposal formulated by the Labour Minister took the spotlight: Spanish legal retirement age would be progressively raised from 65 to 67 years of age (see article in Bloomberg) between 2013 and 2025.

It is quite a bold statement from a Government which has otherwise been troublingly ineffectual in dealing with the effects of the global downturn in Spain. With unemployment rate already at 19% and likely to surpass 20% in the coming months (see article in Spanish in El País) and soaring budget deficit, which has already reached 11.4% of the Spanish GDP, it was clear that the government should change its ways of appeasing trade unions and civil servants.

The measure has been labeled as 'exaggerate', 'unnecessary' and 'hurried' both by trade union leaders and opposition parties (see article in Spanish in La Vanguardia). Although the argument that the current situation of the Spanish social security accounts is not yet worrying (they ran a surplus until last year), things can only worsen if the problems are not addressed soon. Spaniards are aging: according to Spain's Instituto Nacional de Estadística (INE), the number of people over 64 years of age will double by 2050. That's certainly a fact nobody should ignore. Moreover, the current proposal does not intend to establish a new age limit overnight, but just progressively and during the years where the last generation of Spanish baby boomers will enter retirement age.

However, this proposal has another side, maybe less discussed but equally important: the clampdown on early retirements by financially healthy companies that just want to slash payroll avoiding doling out heavy compensations on fired long-term employees. Although legal retirement age is set at 65, the real average retirement age in Spain is currently at 63.5, mainly thanks to this phenomenon. According to Celestino Corbacho, Spain’s Industry Minister, it’s not about banning early retirements but making companies responsible for the related costs. In other words, under the new proposal, solvent companies would be forced to pay for the pensions and entitlements of its former employees until they reach the legal retirement age, which means lowering the current burden on public finances. Moreover, the proposal also includes raising the minimum age to accede to early retirement from 52 to 58 (see article in Spanish in El País).

Markets, investors and companies needed some signal that the Government would fight to limit and reduce spending, even if it’s a rather long-term plan. Although the government raised taxes on income from savings and announced an increase in value-added tax to take effect July 2010, further expenditure savings were also needed.

Therefore, plans to slash the budget deficit by two thirds by adopting spending cuts of as much as 50 billion euros by 2013, mostly centered on the budget for the body of civil servants–new hires will be frozen, as probably will also salaries–are an important step towards fiscal responsibility. The Spanish government needed to step in and implement measures that, although unpopular with some sectors of the population, are needed to steer public finances in the right direction.

Although this might mean many–including this correspondent–will have to work longer to earn their entitlements, soaring deficits, bleak economic projections and the fast ageing of the population made reforms in the current welfare state necessary if Spanish people want to be entitled to old age pensions when they reach retirement age.