Finance Pension

Does A New Tax To Finance Pensions Make Sense?

ShareTweetPin0sharesSocial Security will only be viable in the future if income grows faster than expenses. And this depends on the productivity growth of the labor and employment factor. At the gates of a new electoral

Social Security will only be viable in the future if income grows faster than expenses. And this depends on the productivity growth of the labor and employment factor. At the gates of a new electoral campaign, the political parties have presented their respective programs and their promises in economic matters. In this sense, the discourse that each one of them is making regarding pensions is extraordinarily relevant. Not surprisingly, only pensioners represent around 9 million voters and it is a group whose vote is very sensitive to the message given by the different parties: from those who promise abundant aid to others that ensure finance pensions increases.

When talking about pensions, the reader usually associates it automatically with the pensioners’ group when the workers who are currently active and those who are currently entering the labor market are affected. It is always good to remember that the Social Security contributions that a current worker pays are not to finance his pension but to finance that of his parents who are now pensioners. That is to say: the pension of a current worker will not be paid by him but by his son. Therefore, the Spanish pension system is given the surname “cast.”

This point is key to understanding, in the first place, why it is an issue that should concern (and much) active workers (and not so much retirees) and, secondly, to address the serious structural problem that Does the current public pension system have both in terms of sustainability (that pensions can always be paid in the long term) and sufficiency (how much money is the pension based on the needs of the pensioner?).

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It is clear that there is a serious problem of the viability of public finance pensions since the money destined to pay them is increasingly lower (income from contributions) and expenses are increasing (the population is increasingly longer and more years charging). For now, the “patches” that have been put in the last 25 years have not solved the problem of long-term sustainability.

Thus, in 2015 the greatest Social Security deficit has been reached in decades, in times of economic growth exceeding 3% per year! Nothing more and nothing less than around 15,000 million euros and leaving virtually no room for maneuver to the Social Security Reserve Fund: that piggy bank that was created to save the surpluses of the Social Security box to meet the needs In times of economic crisis.

Given this situation, there is only one solution: cut expenses and increase revenues. Since most of the actions have been done through expenses (stop indexing inflation pension or lower the regulatory basis to determine the amount of the pension based on the last salary received), several parties have raised to go by way of income to the point of creating a new ad hoc tax to finance pensions, if possible as a tax surcharge for large fortunes. But is it a good idea?

Beyond that it may be a good or bad economic idea, it is an approach that does not get to the bottom of the matter. Take the “radish” by the leaves. To understand each other: it remains in the “easy” way of trying to solve the problems at a tax blow. From the outset, it is evident that whenever an attempt has been made to solve a problem by creating a new tax, it has not solved it.

It may even make the situation worse because of the perverse incentives it creates.

As if that were not enough and at the same time, this plan to create a new tax ignores the budgetary independence of the Social Security Fund. In other words, ordinary taxes cannot, under any circumstances, finance Social Security expenses, nor can the expenses of the rest of the Public Administrations be paid with social contributions. Therefore, before placing any tax to finance pensions, Spain would have to ask the European Commission for a reform of the European System of National Accounts (the accounting regulations in force at this time) so that a tax of an ordinary nature can finance its expenditure of the Social Security box.

In this sense, if the new Government wanted to do something of this kind avoiding the reform of accounting regulations, it would have no choice but to raise Social Security contributions, currently set at 29.9% of gross salary as an employer contribution and 6.35% as a contribution paid by the worker. If contributions go up, employment is penalized and, therefore, a high risk of job destruction is created. But at the same time, it would make Spain the country with the highest social contributions in the world. There is nothing for a salaried population severely punished by the direct tax burden on workers.

In summary: Creating a new tax can create two bigger problems and not solve what is the viability of pensions in the future. The “surcharge to the great fortunes” card is nothing more than a political slogan without practical value since those who call “rich” do not pay taxes in Spain. It would be a new fiscal rise to the middle and working class.
Instead of taking the “radish by the leaves”, let’s go to the roots of the problem. Social Security will only be viable in the future if income grows faster than expenses. And what does the rise in income depend on? Fundamentally of two things: on the one hand, the growth of the productivity of the labor factor and, on the other hand, of the growth of employment.

Only in this way, today’s workers will have their pensions guaranteed tomorrow. Meanwhile and in the short term, measures can be taken such as removing widowhood and orphanhood pension expenses (approximately 23,000 million euros in non-contributory pensions) from the Social Security Fund and taking it to the Budgets State generals to be financed via ordinary taxes. But I fear that no party will raise it and less the need for more people to work in Spain and that these people are increasingly productive so they can have better salaries.

Above all points to gather we can say that tax planning services and tax preparation services aren’t easy now as the new electoral campaign type programs started by the political parties for economic matters.

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