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Pension reform, Politics, Spain

The great private pensions fraud

Fresh from implementing reforms of its pension system Mariano Rajoy’s Spain is now preaching the merits of its pro-market policies to the rest of Europe, backed by the Troika. But state pension cuts and the virtues of private insurance-based schemes are built on myths that serve financial capital, argues Vicenç Navarro

There’s been a constant onslaught by banks and private insurance companies to convince the population that state pensions are unsustainable, that due to demographics (more and more elderly and fewer young people) they can no longer be afforded. It is constantly repeated that there will not be enough young people to pay for the pensions of the elderly. And because of the enormous influence that these institutions have on the political, media and academic world in Spain, this thesis of the unsustainability of pensions has reached the status of dogma. All the governors of the Bank of Spain, including the present one,  Luis Maria Linde,  and the presidents of the European Central Bank (like the present incumbent, Mario Draghi ) have emphasized the need for the Spanish population to take out private insurance for a private pension plan that will maintain the standard of living to which they are accustomed, stressing that public pensions are can no longer be guaranteed.

This position is also promoted by most economists of neo-liberal bent (which are the majority today in the academic world), reaching its peak in the statements of ultra-liberal economists such as the Spanish broadcaster TV3’s in-house economist, who proposes the privatization of social security, as did the government headed by General Pinochet in Chile. In that country, the net replacement rate of public pensions – the percentage of a worker’s pre-retirement income that is paid out upon retirement – is very low. It is less than 6% of the average wage, requiring a top up from private insurance, and insufficient to maintain the standard of living of workers once they retire. The Chilean system sees pensioners’ retirement income halved (52%) in real terms. whereas in Spain the public pension system affords pensioners 80% of their previous purchasing power.

Subsidizing financial capital

In this promotion of private pensions, the state plays a key role. In Spain, the state subsidizes private insurance. It provides about 2,000 million euros, according to 2012 data, so that people who buy private insurance pay 2,000 million euros less overall. A huge corporate gift. For the reader to understand what this means, it suffices to recall that former socialist PM José Luis Rodríguez Zapatero froze pensions by precisely 1,500 million euros in order to reduce the public deficit, stressing that there was no alternative to getting the money (that is, to reduce the deficit) than to freeze pensions. This assertion that there was no alternative was not true. He could have eliminated the deductions (that is, the public subsidy) to the private pension industry, thus getting more than that amount.

Needless to say that as a result of the enormous influence of finance capital (banking and insurance) on the media (all indebted to the banks), none of the mainstream media suggested this measure as an alternative to freezing pensions. And naturally FEDEA, a think tank sponsored by banks and large corporations and thus spokesman of finance capital, and its magazine Nada es Gratis (Nothing is Free) that is frequently quoted in the media, did not say a peep. Instead, it applauded the pensions freeze, arguing that this policy was indicated maturity and political realism. In turn, the economists of the Zapatero and today’s Popular Party government of Mariano Rajoy (who cynically opposed the freezing of pensions only to support this when in government) applauded the measure. And, of course, the Troika (the IMF, the European Commission and the ECB) and the leaders of the European Union also welcomed it. It is important to note that, in general, the same voices calling for public pensions to be reduced because there will not be enough young people to pay for them support policies that have lowered wages and led to job destruction (eliminating private and public employment) that force the young (among whom unemployment is over 50%) to leave the country.

Pension privatisation
The privatisation of pensions is championed by Spain’s financial, economic, media and political establishments and the EU. In all cases it is assumed that private pensions are better than public ones. What is surprising is that all the data (credible and rigorous) show just the opposite. Even institutions of neo-liberal bent such as the OECD, in its Pensions at a Glance 2013 report, recognize that the private pension system in Spain is a disaster. The narrative does not use that term, but their findings justify this diagnosis.

Less conclusive, but also very unflattering, is the report submitted by a group of researchers from IESE, a graduate business school of the University of Navarra with campuses in Barcelona, Madrid, and New York City that has been following the evolution of private pensions. According to the report, of the 257 private pension funds with at least 15 years of history, only 1.16 % (yes, only 1.16 %) achieved an average return superior to government 15 year bonds. A further 10% had losses, meaning, the insured lost money. The profitability of most was low. The best performance was only 1.58% (government bonds had a higher average interest, of 4.4%, for the same period). Indeed, the OECD has indicated that the average return on private pension funds in Spain (2008-2012) was negative in real terms (after inflation). After Estonia and Poland, Spain was the country with the worse performance.

But what is even more interesting is the fact that though they have a very low return, it didn’t go badly for the managers of private pension funds. This is really hugely interesting. In the same way that Spanish bankers are the best paid in the European Union, although Spanish banks offers very little credit to the real economy, failing to perform their social function, the managers of insurance companies have higher incomes, precisely because of the low level of pensions payouts (the low real rate of wage replacement for future retirees) and the high fees these managers charge. The managers of the insurance companies receive commissions (what managers and captains of the insurance companies take as pay for each insurance policy) that are the highest in the EU. This situation is outrageous.

Private pensioners are clearly unprotected in the face of financial capital and its operators. And to complicate matters, financial capital has a huge influence on the state. In fact, most public authorities responsible for overseeing private pensions are individuals from or who end up working for such companies. There’s a revolving door between the top brass of the General Directorate of Insurance and Pensions, the Spanish government’s financial regulatory agency, and the very insurance companies and private pension funds it is charged with supervising and controlling. This revolving door is at its height when the Popular Party is in power – during the José María Aznar administration (1996-2004) and again today under PM Rajoy, both the biggest cheerleaders of pension privatisation. But virtually nothing of of this has been said to citizens, including those who have private pensions.

*Professor of Political Science and Public Policy, University Pompeu Fabra of Barcelona

El Publico

Translation/edit by Revolting Europe

About revoltingeurope

Writer on Europe's Left, trade union and social movements @tomgilltweets or @revoltingeurope

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