“We’re heading quietly towards a different welfare state from the one we know”
Antonio Cabrales (Madrid, 1964) has a PhD in Economics from the University of California and is one of the most authoritative voices in such fields as the relationship between the economy and the education system. Prior to his professorship at Universidad Carlos III de Madrid he held equivalent posts at University College London and Universitat Pompeu Fabra in Barcelona. His research areas include social media economics, both experimental and behavioural, game theory and industrial organisation. He is executive vice-president of the European Economic Association and has published in the top scientific journals in economics, for some of which he has also served as editor. In addition, he is one of the instigators of Nada es Gratis (“Nothing is Free”), one of the most successful economics blogs in Spanish, where he fosters analysis on the main problems Spanish society faces today.
How do you see the sustainability of the welfare state in Spain and the pension system in particular?
Spain’s demography isn’t very good for sustaining a pay-as-you-go pension system like the one we have. The figures provided by the National Statistics Institute tell us that, if right now we’ve got a dependency ratio of around 35%, in other words, each pensioner is sustained by three people, that figure is going to rise in a big way. The dependency ratio will reach 55% or maybe even 60% twenty or thirty years from now. By the middle of the century we’ll have under two workers per pensioner and that makes it very difficult for us to maintain pensions at the levels where they stand at the moment. If we wanted to keep up the replacement rate, i.e., the percentage of the final salary that’s paid as pensions, broad estimates indicate we’d have to spend 15 or 20% more of the GDP on pensions; in other words, taxes would have to go up substantially.
And that looks complicated…
Yes. Considering we have a hard time levelling the public budget even in relatively good years like 2019, it doesn’t look like we’d want to do anything like that. And that means, in all likelihood, that pensions will have to go down. Because I don’t think we’re capable of doing the alternative, making hefty tax increases. That’s the dilemma we’re arriving at, and it’ll become more acute around 2040 or 2050. After that the situation will stabilise and ease off a little, but it won’t improve greatly.
So we need to look for solutions. What are the most plausible ones?
Apart from preparing to make large tax rises, other alternatives are to raise the retirement age by enabling people to carry on working more years, or to increase the labour market participation rate, and that would probably mean a major overhaul of labour laws, which aren’t very good. Then there are other solutions related to improving the demography, but the trouble with them is that it’s a very slow process. If, by some miracle, there were a baby boom over the next five years and an extra two million children were born, around 2050 they would still only be halfway into the labour market.
If the situation of the pension system were unsustainable, might families have to end up bearing the cost of caring for their elders, as is already happening with that of caring for their offspring?
One formula which has to do with what you’re talking about, and might be part of the solution, involves improving the financial market and the possibility of having reverse mortgages. In Spain, more than in other countries, most of a family’s capital is invested in their homes and properties. You might have a 70-year-old woman with a flat worth a million euros in the Eixample district of Barcelona, or in the Salamanca neighbourhood of Madrid, who struggles to get by on a €500 pension. An obvious solution is to convert that amount of wealth into cash with a reverse mortgage, and for that capital to be enjoyed by the interested party while she’s alive rather than by her family when she dies.
With the picture you’re painting, to what extent can we say the welfare state is endangered in Spain?
Endangered in the sense of it disappearing, probably not. But no doubt it’ll be different, along the lines that have already been implemented in the reforms of recent decades. It’s called the silent reform: maximum pensions have been falling constantly (in real terms) and this process could accelerate. If the pension interval is compressed, Spain may converge towards a model like the British one, which has a pension system that here we’d call a welfare type. It’s a flat rate, the same for everybody. And pensions above that figure come under pension schemes, which are often compulsory and set by collective agreements. We’re heading quietly in that direction, towards a sustainment model that’s completely different from ours, because there doesn’t seem to be much interest in taking stronger measures in other directions. The problem is, if we do it quietly, we’re going to arrive at the welfare pension without having set up the private capitalisation supplements.
Might it prove a burden to neglect education, in terms of the competitiveness of future generations in an increasingly technological and globalised setting?
Again, this may be a new silent reform that we’ve been experiencing over the last few decades. Spain and Italy are the two European countries that have grown least in technological progress in recent decades.
And this has to do, at least in part, with the fact that education hasn’t improved at the rate it should in relation to other countries. It also has to do with the fact that we’re specialised in certain activities that have little room for technological improvement and little need for education. That is a serious additional problem.
Would investing in R&D be a useful strategy to make up for this shortfall?
Undoubtedly. A 20 or 30 year strategy with heavier R&D spending is always welcome. In Spain we devote about 1.2% of the GDP to it, whereas the rest of Europe spends 2% or more. Raising R&D by 1% a year and keeping it that way would be really important. Because traditionally the problem is that in the good times governments invest plenty in science and technology, but when the bad times come it’s the first thing they cut back on. We also need to spend more on education and make a serious effort to transform it. At the same time we’ve got to modify our labour market, which has huge scope for improvement. And it’d be important to do all this together, because all these actions are coordinated with each other and the sum of all of them is greater than each of them separately.
Will the technological revolution increase or decrease intergenerational equity?
Intergenerational barriers have to do with how our pension system works. The pay-as-you-go pension system works as a kind of intergenerational deal in which the generation currently on the job market supports its elderly and the next generation will support them. If I’m young and I think the people who come after me aren’t going to support me, it’s in my interest as a generation not to support my elders, and so the system collapses. So it’s very important that there’s trust that the deal will be kept. Otherwise, as soon as somebody starts to doubt, the cycle may be broken for ever. This trust between generations is extremely important, because without it a pay-as-you-go pension system completely disappears. If you then add problems like the technological revolution, or people thinking that the young are going to be so precarious that they won’t be able to support them even if they want to, the in-built precariousness of this deal is exacerbated.
But we’re already in this state of precariousness and doubts.
Exactly; the important thing is not to accentuate them and send out signals that there’s no reason to worry because everything’s going to be alright. Beyond hollow declarations, it’s also necessary to implement measures that show a will to improve future conditions, raise the birth rate, encourage immigration, enhance the job market, education, research...
Now you mention policies to raise the birth rate, what are the most effective?
Systems of allowances for families who have children are effective for making the reduction in the birth rate less dramatic, but it’s not going to get rid of it completely.
It’s just another tool in the toolkit that you have to build, and the best tools are the most committed policies, sustainable over time. They’re the most convincing and effective, and they should be related to improvements in children’s education, the conditions of the return to the labour market when the time comes, and so on.
In an increasingly globalised world, we’re seeing how even health is also a planetary problem. Should global standards be established to foster greater economic and social balance?
In order to advance collectively, for example in Europe, one of the first measures to coordinate is migration policy. A certain amount of coordination in a continent that’s aging would be very important. Apart from that, one of the reasons why somebody might have doubts is that these policies we’re talking about are going to cost money, and the only way for governments to get money is to put up taxes. So a greater coordination of tax policy within Europe would be important to stop companies setting up in countries with more advantageous tax regimes. A consensus should probably be reached that, if we need to spend more to encourage childbirth, it’s in everybody’s interest to avoid drifting into a tax war.
What are the factors that cause Spanish young people to take so much longer than most Europeans to leave home?
The main reason is that young people in Spain take much longer to find a steady job than they do in other countries in Europe. And not only do they take longer; the starting salaries they get are much lower too. The combination of job insecurity and low salaries, but especially the former, makes it more difficult for Spanish youth to leave home.
Is this an endemic situation, or can it be reversed?
The problems of the Spanish labour market have been diagnosed to death, and almost all of them have to do with the fact that the labour legislation is inadequate. What’s more, companies have got used to this legislation, and they’ve even specialised in certain types of sectors where this legislation works in their favour. So changing isn’t straightforward, because social actors depend on this legislation and they’re not interested in changing it. It’s an age-old problem, and if it hasn’t changed already I don’t think it will in the future.
So, what are the emerging problems that coming generations will have to cope with?
It seems clear that the growing automation of some productive sectors of the economy is going to cause the structure of employment to change. That’s the most important change on the horizon. All the forecasts I see suggest that the actual number of jobs isn’t going to diminish; instead, they’re going to polarise even further. There are going to be more “good” jobs and more “bad” jobs. Those “bad” jobs are the ones we are, in part, specialised in – whereas we’re not so specialised in the “good” ones. The latter may grow, and maybe we’ll need more highly skilled workers, and they won’t be available. This structural shift in the economy, with greater technological skills, will have major implications.
What effects might these issues have socially?
Spain is already an unequal country, but not much more so than others within the European context. And the level of inequality has more to do whether you have a job or not, rather than wages as such. With this change on the horizon, inequality in Spain, like in other countries, probably won’t improve but get worse, because the wage distribution will get worse too.