Sunday, February 21, 2010

Think Globally, Act Locally

Earlier this month, John Hempton penned a piece on the demographic challenges to be faced by the governments of the world's post-war industrialized countries. Simply put - too many retirees will, thanks to the overwhelming nominal success of scientific medicine, be living too many years. The resultant underfunding of pensions and health care programs will not be alleviated by the too few offspring that the baby boom generation brought into the world. Here locally, we already have a nice micro version of this.

The contract between the teachers' unions and the regional departments of education in Spain specify that an individual instructor can choose between paying into the public social security health system or a private insurance plan. The latter option (which most take - although it is not a slam-dunk if you live in small town) involves signing on to an administrative organization - MUFACE, for example - which, in turn, strikes deals with the insurance companies. The teacher then picks which company he or she wants after considering facilities available, or whatever. Lately, according to the schoolteacher to whom the writer is married, various insurance companies have abandonned accords with said MUFACE.

The problem, apparently, is the increasing average age of the educational workforce. A national birthrate of 1.1 does not require the continued hiring of young teachers and the ones that are working are becoming more and more costly to maintain in good health.

One has to assume that recent government proposals to extend the retirement age to 67 years will have more insurers rethinking their relationship with public sector unions.



santcugat said...

Options I see:

- Later retirement
- Lower pensions
- Higher taxes
- Encouraging high risk sports among the elderly
- Robots

Chistopher said...

The situation which could well develop if retirement age is extended to 67 years plus is the following:

Companies are now able to take advantage of the early retirement package drawn up in the now obsolete Pacto de Toledo. So effectively, many employees have been retiring in their early sixties or even earlier. Obviously this is at complete odds with the plan to extend the retirement age to 67, so that will be abolished.

In addition, talks are under way to reform Spain's archaic labour laws, in particular the basis on which severance payments are made. Initially, compensation might be a maximum 25 days for evey year worked perhaps being further reduced in the future.

At present many companies think twice before firing a long-serving employee in his fifties. It's better to pay him a few years more and then go for the early-retirement scheme. But if the company needs to keep this person on the payroll until 67 years of age and only needs to pay him off at 1.5 years of salary instead of the current 3 years plus, what is this company going to do? Muchas gracias e adios I think. I can foresee millions more middle-aged workers joining the dole queue! A better solution is to get people to contribute more during their working lives, perhaps supplementing their state pensions with private pension funds or directly through company pension plans for all workers not just for bosses as it is now. That is the direction the debate on pensions should be going imho.

Finally, I would like to point out that the developing crisis with pensions in Spain is not only because of demographic reasons as the government would like us to believe. In Jan 2010, 257,000 people ceased to be Social Security contributors primarily because of the dire economic situation. There is a medium/ long term demographic problem and an immediate crisis associated with the the country's rapidly deteriorating public finances.

Saludos, Chris.