Benito Arruñada - Universitat Pompeu Fabra
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Retiring before We Work

Arruñada, Benito (2010), “Retiring before We Work”, Expansión, February 22, p. 46.
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The Spanish public has recently received two items of news: we shall live longer, but retire later. The two announcements are connected because we shall have to work longer to finance, amongst other things, the health care expenditure that will help us live longer.

Because of this connection, we should note that decisions in both areas are also related. But we usually separate them. We hope to retire early and live longer, a dual demand that is impossible to meet for everyone. But many citizens and a good number of politicians seem not to understand this.

Although this is not a real possibility in Spain, there is a lot to learn from how the two decisions would be taken in the market. Citizens would have to choose when to retire and how much they want to spend on their health insurance. This would be similar to saving money in a pension fund. In order to save, they would have to spend less on other things, including their health insurance. For example, people could choose a cheaper health insurance, one that does not cover costly technology that may or may not work, or one that includes excess and co-payments to prevent their abusing it in the future.

Obviously, it would be difficult for potential purchasers of pension funds and insurance policies to decide on the right product, and collateral damage that is difficult to resolve may well occur. But we can learn from such market solutions, adapting them to improve our situation.

The key lies in linking cost and benefit decisions, sharing them out in a fairer way. A viable and less unfair welfare state needs citizens to consider both costs and benefits. They need to be aware of their choices between quality of life and current and future consumption, and they need to remember that it is they themselves, and not other people, who have to pay for what they consume.

Otherwise, we will be voting and taking decisions on benefits as if we did not have to pay for them. When we go to the doctor, we ask for the most expensive medicines even if a much cheaper generic one would serve us equally well. In hospital, we expect top-class service and the latest technology, and we are delighted to hear that Spain is a world leader in transplants. But we hate paying tax and, when retirement age comes along, we expect to retire even if we are still in good health and working at full capacity.

Such shortsightedness about costs is not sustainable. We need to learn at least several lessons from the market:

1. Whatever the total amount we decide to spend on pensions, we have to be better at linking the amount of each pension to the contributions made during working life. Setting the amount of individual pensions on the basis of the last few years worked is unfair and will eventually turn against the system. It is damaging for those whose incomes grow less over time, that is, the less skilled workers.

2. We should also be allowed to receive a pension while continuing to work. People would have us believe this destroys work, but there is nothing further from the truth—all work generates demand and, in consequence, new jobs.

3. In order to help citizens realize that it is they who pay taxes, prices should be given without VAT, and income tax withholdings should be set lower so that most people have to pay when filing their income tax returns instead of receiving a rebate, as is the case now.

4. We should also eliminate the deceptive distinction, which exists for accounting purposes only, between the payments that are made to the Social Security “by the employer” and “by the employee”. This leads people to believe that social services are much less costly than they really are.

5. Finally, we need to start discouraging superfluous expenditure and consumption. We all know that our medicine cabinets at home are full of expensive but unused drugs. And the problem goes beyond the health sector. University classrooms all over the country are half empty because students consider they have the “right” to not go to class.

If the welfare state is to have a future, such asymmetry and ignorance must be avoided. Otherwise, we will continue to dissociate costs and benefits, running the risk of retiring late and dying young.