Falling Birthrates and Pensions in Spain

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Great medical advances that are lengthening life spans and an abysmal fall in birthrates are causing a dramatic aging of the populations in rich nations. For the welfare state, these demographic trends represent a virtual death sentence. Western Europe faces particular trouble, and Spain especially so.

Spain has the lowest birthrate in the world. For Spain's population tostayat its present level (approximately 39 million people), women would have tohave an average of 2.1 children. But Spanish women are having an averageof1.15 children. If this trend continues, Spain's population will decreaseto30 million people over the next 50 years (assuming that immigration remainsat its present levels).

Several cultural and economic factors may explain the fall in birthrates.As women have entered the labor force in greater numbers over the past 25years, they have delayed the average age at which they marry and,consequently, the age at which they start having children. Because mostSpanish women will marry before having children, that social change reducestheir effective period of fertility.

Economically, the most important factor is the lack of opportunities foryoung people. Poor job prospects are a product of a very rigid labormarketand an onerous welfare state. With the unemployment rate among youngpeopleat 35 percent, many simply postpone starting a family. As long as thepublic pension system -- the heart of the welfare state -- continues inSpain, the situation for young people will hardly improve.

Under a pay-as-you-go pension system, the government taxes active workerstopay for the benefits of retired workers. Retirement benefits depend on agrowing labor force and increases in labor productivity. But payroll taxesincrease the cost of labor. Thus, they create unemployment and reduceproductivity, because it becomes more advantageous to invest in capitalthanin labor.

In Spain, social security taxes are equivalent to 28.3 percent of totalpayroll. Such high labor costs are detrimental to workers with lessexperience and lower qualifications, who are generally younger workers.

As the elderly population in Spain increases, the ratio of active workerstoretired workers decreases, which means that Spanish workers will have topayeven higher taxes than they do now to finance the public pension system.Infact, the so-called elderly dependency ratio is projected to increase from24.4 percent in 1998 to 54.4 percent by 2050. With an unemployment rateabove 18 percent, any measure that would raise the cost of labor even moreis bad economics and political suicide.

Even though they fear the political repercussions of dismantling a welfarestate that is collapsing under its own weight, Spanish officials have notseriously tried to prevent the coming crisis. The cosmetic reforms theyhave adopted maintain the basic structure of the public pension system.

After passing the euro test, the Spanish political class should startconsidering the merits of a privatized social security system, a reformthatuntil now has been discarded for ideological, not economic, reasons.Indeed, a study by the Madrid-based Círculo de Empresarios shows that thehighest annual transition deficit would be equivalent to 4 percent of grossdomestic product, or roughly equal to the annual deficit of the state-ownedTV networks. Privatize those networks and the transition would not costtaxpayers an additional peseta (or euro).

By privatizing the public pension system, Spain could avoid a growingintergenerational conflict. It would also create an environment morepropitious for young Spaniards starting families, making it less likelythat Spain will become the largest retirement community in the world.

L. Jacobo Rodríguez

L. Jacobo Rodríguez is assistant director of the Project on Global Economic Liberty at the Cato Institute.