The report to the Spanish parliament of the Social Security Reserve Fund (FRSS in Spanish), presented at the end of March, showed that 15.3 billion euros were used in 2014 to cover a deficit of the Social Security system. With this amount, since 2012 withdrawals from the FRSS total almost 50% of the fund's maximum capital, reached in 2011. Has the FRSS been used appropriately? To what extent is it possible to continue to make use of the Fund's resources?
The FRSS was set up in 2003 with the aim of accumulating surplus Social Security revenue to cover payments of contributory pensions and its management expenses in prolonged situations of deficit. These resources can be invested in public debt from Spain, France, Germany or the Netherlands that is issued in euros and with a high credit rating, although only Spanish bonds are held at present. The use of assets from the FRSS was limited to 3% of the total of the aforementioned expenditure, although in 2012 the limit was removed for three years and last year this exception was extended to 2015 and 2016. Almost 34 billion euros have therefore been consumed from the FRSS in three years to finance around 11.2% of all pension payments and a further 8.5 billion is expected to be used in 2015, according to the Social Security budget.
The FRSS balance has fallen from 53.7 billion at the end of 2013 to 41.6 billion at the end of 2014, at purchase prices. But part of this reduction has been offset by growth in the portfolio's value: at the end of 2014 its market value had increased to 47.7 billion euros. Within the current context, with very low interest rates and probably little margin for these to fall any further, selling state bonds seems to be a good financial strategy as it realises the portfolio's latent gains in value.
It should be noted that the FRSS has only invested in Spanish public debt and no other assets since 2014 and that the state transfers resources to Social Security every year (to pay non-contributory pensions, among others). Consequently, in practice there is a unity of cash between Social Security and the state and the purchase of public debt by the former is a way of financing the deficit of the latter. Moreover, using the Fund to pay pensions does not affect the consolidated debt for all public administrations as a whole.1 The sale of Spanish public debt by the FRSS increases the level of debt of public administrations as debt securities are no longer consolidated if they are not held by Social Security. The alternative to using the FRSS to finance this deficit would have been for the Treasury to issue more debt, which would have increased the level of public debt by the same amount.
The underlying issue is therefore the Social Security deficit per se and not so much how to finance it, in particular considering that part of the deviation of Social Security accounts is due to structural factors. The economic crisis has led to a temporary drop in company contributions but, in addition to this reduction in revenue, there has also been a structural increase in spending on pensions due to the ageing population and the rise in the average pension.2 The depth and duration of the recession lies behind the more extensive use of funds over the last few years; however, once the economic recovery is fully on track, revenue from contributions should increase in line with employment and the use of the Fund should be more limited. It is advisable to take advantage of this improvement to diversify the assets invested in by the FRSS and thereby provide it with funds that ensure the long-term solvency of the pension system.
1. This is the level of debt according to the Excessive Deficit Protocol (EDP) used by the European Commission as a benchmark.