Government uses Social Security fund to tidy its deficit

Exactly one year ago the government announced that it would authorize the use of 3 billion euros of the Social Security Reserve Fund -- the system's piggy bank -- in order to cover liquidity needs. Yesterday the Minister of Employment, Fátima Báñez, told Congress that that fund, which had 69.2 billion euros in September of 2012, will have only 53.2 billion at the end of this year. The Social Security system has used 24 billion euros of its cash reserves during the last two years -- plus another 5 billion from the Prevention Fund -- and forecasts that until 2016 the system's total accumulated debt will reach 36.5 billion euros. This is a third of its current annual budget.

The system got to this point because since the crisis began, 3.1 million fewer workers are paying social security taxes thanks to severe job cuts. And nothing has been done to solve the problem besides dip into the reserve fund. Changing pension payment amounts and creating the sustainability factor are two changes that were approved this month and will go into effect in 2014 and 2019, respectively.

The government cannot argue that it didn't know that rising unemployment was undermining Social Security contributions. Nor can it ignore that contributions have fallen 16%, but the number of retired workers drawing a pension has risen by 500,000. These are reasons enough to take action. But nobody did, and as a result the system will only be able to use 6 billion euros of its reserve fund in 2014.

The government said that in 2012 it used 7 billion euros and that in 2013 it has already used 10.5 billion. Rajoy's promises about the retirement system are empty so far, and now he's eating his words. Looking at how the government is managing the Social Security system and its national budget, it looks like retirees are receiving lower pensions in order to help balance the national budget. As we have reported on previously, Montoro has no more tools to fix the deficit because he has failed to carry out important reforms to the tax system and public administrations.

Next year, the Social Security system needs to lower its deficit by 3%, and the national government will only have to cut its deficit by 1%. Plus, the national government will slash the transfer payments that it makes to the system by 2 billion euros (from 15 billion to 13 billion) and other financial hardships. The system will carry most of the weight and have to resort to its Reserve Fund in order to cover extra costs and reduce its spending so that its nominal deficit does not increase.

Since the crisis began, the government has financed the Social Security system's reserve fund considering that practically all of this money is invested in Spanish treasuries. But since 2012, the system has been drawing on its reserves in order to cover a liquidity shortage without making spending cuts or reforms, because both would be unpopular with retirees. Ultimately, the Finance Minister will meet the deficit goal and cut taxes, as he announced, a year before elections.

What the government is not going to do is instill confidence in retirees and secure the system's financial future. Piecemeal reforms are not working, but it is good that the system is updating its methods for determining retirement check amounts and retirement plans. The savings that businesses and workers will capture ought to be used to create a more sustainable retirement system and not to pad the national government's deficit.