The new Spanish government is doing battle on yet another front. The economic crisis and rampant unemployment have crushed the Social Security reserves. This system's accounts are now in the red, and as in 1996, the system may need to ask for extra credits. This request would have an impact on the federal budget.
But the consequences extend further. Not able to count on positive revenues from contributions, there is nowhere to draw from in order to bolster pension fund accounts. Specifically, in 2012 the national Social Security program will not be able to call on the Social Security Reserve Fund, which guarantees payment for future pensions before making adjustments.
So falling social security contributions, something that points to Spain's urgent need for labor reform, gives Rajoy's team some leeway to sort out public accounts and fiscal consolidation. Tax increases will be the leading focus of these measures.