Pensions, productivity and entrepreneurship

Rafael Pampillón. Professor. IE Business School

18 December 2012

The figures tell us that the Spanish pension system needs some kind of stimulus if it is to survive, and the only way to provide it is through productivity.

The Spanish National Institute of Statistics has forecast that in forty years’ time 37% of the Spanish population will be over 64, up from the current figure of 17.4%. Today there are 8 million people in Spain who are over 64 years of age, and by 2052 that number will stand at 15.2 million. For many years now, a large number of economists have issued constant warnings to Spanish governments about the risk of a future budgetary imbalance due to insufficient health and pension provisions. The OCDE also keeps insisting in its periodic reports on Spain’s economic situation on the need to modify the current pension system by increasing the age of retirement, basing pension payments on all the contributions each worker has made to the system, introducing capitalization elements, increasing Spain’s birth rate, etc. Raising taxes and cutting services is another way to do it, but is also very unpopular. Another alternative would be to raise the amount the worker pays into the social welfare system, which is the same as raising the cost of workers, which in turn would result in higher levels of unemployment.

Why is there so much concern about pensions? The long answer to this question is that in just a few decades’ time Spain will have one of the oldest populations in the world. This rapid ageing process is the result of one of the lowest fertility rates in the world (1.36 children per woman) and an increase in life expectancy. Women born in Spain are currently among the longest living Europeans, living on average to 85 years old, while men live an average of 79 years (the average life expectancy for men in Europe is 72). Both factors – low birth rate and extended life expectancy - cause a rise in the overall age of a country’s population.

An ageing population comes with a growth in dependency, i.e. an increase in the percentage of people who do not work in comparison with those who do. In other words, the active population is shrinking in terms of proportion. Hence the Spanish national institute for statistics  says that in 2052, for each person of working age there will be a potentially inactive person, that is to say, a person who is younger than 16 or older than 64. Specifically, the rate of dependence could reach 99.5%, compared to the current figure of 50.4%.

Hence an ever dwindling number of workers are going to have to sustain an ever greater number of pensioners. This means that the proportionally fewer workers will have to pay increasingly higher taxes because the government will need to provide more social services in the form of pensions and medical bills for the elderly. With every passing year social security will consume a greater portion of Spain’s national income, which will cast serious doubts on Spain’s capacity to guarantee the public pension system. One solution to the problem would be to increase the rate of growth in productivity in order to reduce the percentage of GDP spent on pensions.

Increase in productivity

Productivity is effectively one of the variables that most influence the pension system. High rates of productivity can accelerate growth of GDP and thus help maintain the pension system. Greater levels of productivity mean more production, higher salaries, more money paid into state coffers, and more money for the social security system. So how do we raise productivity? The way to improve productivity is through technological and organizational improvement. When a large number of Spanish firms are closing their doors, increases in productivity can also be generated through the creation of modern, competitive companies designed to last. In order to achieve this it is necessary to shift the economic system toward a focus on innovation and entrepreneurship. Other countries (Finland, Israel, etc.) have managed to do this fast. They succeeded in implementing state programs for startup incubators and for co-investment with entrepreneurs, which have produced spectacular results in just a few years. 

Spain can and should take the same direction. In order to do so it has to promote the creation of both private and public venture capital funds (but particularly private) for investment in projects that combine the creation of new businesses with technological innovation. Hence higher productivity levels translate into support for R&D programs, which with a bit of effort can produce business projects that create jobs.

Better technology

Spain’s National Institute of Statistics recently reported that Spanish spending on Research and Development registered a reduction of 2.8% in 2011 with respect to 2010, the largest drop in the last three decades. That is bad news, given that both private sector businesses and public administrations have to increase the kind of activities on which they can base the much-needed improvement in economic competitiveness. What needs cutting is public sector excess. Most economists agree that the government should cut all current spending that is unproductive and keep spending on activities that improve competitiveness, like education and research, particularly research that can generate knowledge that can be patented and can therefore be applied to the production of goods and services.

Spain has already embarked on this path. The productivity levels of Spanish firms are growing and the competitiveness of our goods and services is increasing in leaps and bounds. In the last 3 years some 30,000 Spanish firms which did not export previously, started to do so. On Thursday the Minister of Finance and Competitiveness reported the interesting fact that during the first nine months of 2012 the export levels of Spanish goods were up by 3.7%.

In conclusion, the rapid ageing process that will take place in the Spanish population over the next few decades means that measures must be taken to ensure the financial viability of the country’s pension system. It is absolutely essential to raise productivity levels. In order to do this a greater effort should be made in the field of research to raise levels of technology. Spain should ensure that the key objective of its technology policy is to contribute to its economic development, and set up centers of research excellence aligned with the needs of the private sector, and capable of addressing market needs. 

This technology needs to be accompanied by funding. Spain needs to develop finance mechanisms that support projects which combine innovation and entrepreneurship. That is what the country has to focus on if it really wants to continue to generate a sustainable economy that creates lasting employment. In short, it has to seek ways (business angels, seed capital, incubators, co-investment funds, etc.) that will enable promising fledgling projects to become competitive businesses.

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