Independence assures pensions

The Spanish government and pro-Spain parties are engaging in a discourse of fear to counter separatism. They have not made any attractive offers to remain as a part of Spain, and if anyone suggests some concessions for Catalonia they are immediately corrected or have to retract what they said. What’s more, their argument is full of inconsistencies. On the one hand, the Spanish government says that independence will never happen, but on the other, they claim that an independent Catalonia would be struck by all sorts of calamities. In this, they show a complete lack of understanding of the reality in Catalonia. They believe the caricature that they have created of Catalonia. An example of this is the recent statements by Pablo Iglesias differentiating Catalans by their birthplace (1).

One of the recurring themes of the discourse of fear is that an independent Catalonia would not have enough funds to pay pensions. This is a very sensitive question that could influence the vote of some groups on 27-S.

The message that I want to convey in this article is that pensions are more assured in a Catalan state than in Spain. Thus, the reality is completely different from the message being broadcast by the Spanish government.

Firstly, it must be said that the resources for paying pensions would not be given to us by Madrid. If Catalonia becomes an independent state, pensions would be funded via the contributions of Catalonia’s workforce. Businesses would deposit the contributions from their employees’ salaries into the Catalan Social Security administration, and in this way, there would be a monthly transfer of funds from workers to pensioners. This financing method for pensions is known as the "redistribution method". As such, it is a mistake to think that retirees are paid from a fund containing all of the contributions that they have paid in throughout their working life, and that this fund is in the hands of the Spanish government. The amount paid during one’s working life is used to pay the pension of those who were retired at that time.

Secondly, Social Security in Catalonia has a more positive balance --the difference between revenue (contributions) and payouts (pensions, unemployment, etc.)-- than in the rest of Spain. When there is a positive balance (surplus), it is greater in relative terms in Catalonia than in the rest of Spain, and when there is a negative balance (deficit), as is the current case due to the economic crisis, it is smaller in Catalonia. All this means that, in the medium and long term, the results will continue to be more favorable for Catalans.

For example, as a hypothetical case, if Catalonia had put the contributions of Catalan workers into a bag from 1995 to 2011 and used those resources to pay pensions, unemployment, and other economic provisions of the Social Security system, then in 2011 there would have been a positive balance of more than 20 billion euros. We would have had a surplus of funds. If there had been a similar bag for the rest of Spain during the same period, then in 2011 there would have been nothing left of those contributions, only a deficit of more than €100 billion.

Catalonia’s more favorable balance is due to three factors: 1) a dependency ratio (ratio of the population older than 65 to the working age population) that is smaller in Catalonia than in Spain; 2) a better job market (there is more employment in Catalonia); and 3) a higher average contribution, thanks to higher salaries.

Currently the deficit in the Social Security administration is financed with contributions from its Reserve Fund and the State budget. This fund was created with the resources from surpluses accrued during the economic boom years.

Now the question is: would Catalonia be able to fund the Social Security deficit, if it became independent today? Yes, it would. First, because it could use the resources from its own Treasury. The Advisory Council for the National Transition has calculated that the fiscal gain in an independent Catalonia, which is what would be produced after financing all of the services of the Generalitat and the new state’s structures, would exceed 11 billion euros. Second, because in a potential negotiation with Spain over independence, we would have to claim a portion of the Social Security Reserve Fund, as this was created in part with the surpluses of Social Security in Catalonia.

In conclusion, the future scenario of the pension system is more favorable in Catalonia than in Spain as a consequence of the fact that Catalonia is wealthier and has more fiscal potential, lower demographic dependency, and a better labor market. The data allow us to confirm that pensions are more assured in an independent Catalonia than if we continue as a part of Spain.

_________

(1) N.T. Spain’s Podemos leader Pablo Iglesias recently urged Catalans of Spanish descent not to support independence.