Falling Birthrates and Pensions in Spain

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 to stay at its present level (approximately 39 million people), women would have to have an average of 2.1 children. But Spanish women are having an average of 1.15 children. If this trend continues, Spain’s population will decrease to 30 million people over the next 50 years (assuming that immigration remains at 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 25 years, they have delayed the average age at which they marry and, consequently, the age at which they start having children. Because most Spanish women will marry before having children, that social change reduces their effective period of fertility.

Economically, the most important factor is the lack of opportunities for young people. Poor job prospects are a product of a very rigid labor market and an onerous welfare state. With the unemployment rate among young people at 35 percent, many simply postpone starting a family. As long as the public pension system — the heart of the welfare state — continues in Spain, the situation for young people will hardly improve.

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

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

As the elderly population in Spain increases, the ratio of active workers to retired workers decreases, which means that Spanish workers will have to pay even higher taxes than they do now to finance the public pension system. In fact, the so-called elderly dependency ratio is projected to increase from 24.4 percent in 1998 to 54.4 percent by 2050. With an unemployment rate above 18 percent, any measure that would raise the cost of labor even more is bad economics and political suicide.

Even though they fear the political repercussions of dismantling a welfare state that is collapsing under its own weight, Spanish officials have not seriously tried to prevent the coming crisis. The cosmetic reforms they have adopted maintain the basic structure of the public pension system.

After passing the euro test, the Spanish political class should start considering the merits of a privatized social security system, a reform that until now has been discarded for ideological, not economic, reasons. Indeed, a study by the Madrid-based Círculo de Empresarios shows that the highest annual transition deficit would be equivalent to 4 percent of gross domestic product, or roughly equal to the annual deficit of the state-owned TV networks. Privatize those networks and the transition would not cost taxpayers an additional peseta (or euro).

By privatizing the public pension system, Spain could avoid a growing intergenerational conflict. It would also create an environment more propitious for young Spaniards starting families, making it less likely that Spain will become the largest retirement community in the world.

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