The Current and Future State of the Social Security System: How the Crisis Has Upended Government Forecasts

The crisis has significantly altered the Government's original forecasts.

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Assessing the current state of Spain's Social Security system is no straightforward task. On one hand, there are the figures published by the Ministry of Labour, on which the Government based its planning for the coming years. On the other hand, the financial and labour crisis has produced data that bears little resemblance to the Government's forecasts for this year, which in turn undermines every future projection built on those now-outdated figures.

A study by Josep Miró of the Abat Oliba University highlights the gap between the Government's pre-crisis projections and current reality. Those projections did not account for the scale of job destruction that has since occurred. As a result, Social Security revenue has fallen far short of expectations, owing to the sharp drop in registered contributors and the surge in unemployment benefit payments. In short, the forecasts that have been relied upon to date are no longer fit for purpose.

Three key questions arise:

1. Could Social Security end the year in deficit?
2. If so, are we facing a structural deficit in the public pension system?
3. What buffer does the Reserve Fund provide?

The University's study drew exclusively on data published by the Ministry of Labour, specifically:

1. Spain's Strategy Report on the Future of Pensions, dated July 2005.
2. The National Pensions Strategy, dated October 2008.

The Social Security income and expenditure projections set out in the 2005 report are summarised in the table below:

As the table shows, Social Security was projected to run a surplus until 2014, with the first deficit emerging in 2015. By drawing on the Reserve Fund, this deficit would be offset between 2015 and 2020. An actual deficit was not expected until 2021, meaning the system was just over a decade away from genuine insolvency.

Since the situation between 2005 and 2007 proved more favourable than the earlier projections had suggested, a new report (already referenced above) was published in 2008 incorporating the actual revenue and fund data recorded by Social Security during that period.

 The findings of that 2008 report are set out in the following table projecting Social Security expenditure and revenue:

According to this updated report, given that the 2005–2007 figures came in better than originally forecast, the Social Security system would remain in surplus until 2023, with the Reserve Fund being drawn upon between 2024 and 2029. In other words, compared with the 2005 report, the system was projected to gain nine additional years of viability.

The limitation of this report, however, is that it assumed contribution revenues would grow faster than GDP through to 2010 and, furthermore, that they would continue to outpace expenditure without interruption, an assumption that has not borne out in practice.

The reality is that in 2008, the number of Social Security contributors actually fell compared to 2007, rather than growing. This decline had not featured in any of the Government's forecasts.

This new situation places us in a worse position than projected in the 2005 report, and with less time to respond.

Other relevant data

Both the Bank of Spain and the International Monetary Fund, in their forecasts published last April, agreed that Spanish GDP would fall by 3%. This means that job losses in Spain will continue and that the number of contributors will keep declining, albeit at a less severe pace than in the final quarter. Even if the projections we make today cannot be entirely accurate, what is clear is that we can no longer rely on the figures we had been working with up to now.