South Europe's families offer short-term fix to pensions crisis

MADRID/MILAN Wed May 28, 2014 9:29am EDT

1 of 7. A pensioner demonstrates outside Madrid's Labour Ministry April 24, 2014.

Credit: Reuters/Susana Vera

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MADRID/MILAN (Reuters) - When Angel Gomez and Maria Luisa Fernandez retired a decade ago, they imagined spending their pensions largely on restaurant meals, holidays and toys for the grandkids. Today, their retirement money helps to support five families.

The Spanish couple, like other relatively prosperous pensioners across southern Europe, are providing an informal safety net which has helped many in the younger generation to avoid widespread poverty despite record-high unemployment.

"I never thought I would have to spend part of my pension to help my kids," said 79-year-old Angel, who worked for 35 years as an administrative clerk at the Bank of Spain. "I am proud of it, but I'm a little worried for them."

In much of southern Europe, pensions have been the most stable type of income during the past five years of economic hardship. In Spain, they rose 8.3 percent between 2008 and 2012, government statistics show. By contrast, incomes of people aged 30-44 - the biggest group in the working-age population - fell 2.8 percent as millions lost their jobs or took wage cuts.

Angel and his wife are typical beneficiaries. Their combined monthly pension of 3,600 euros ($4,900) is almost double the average income of Spanish households, which is about 2,050 euros. It's proven enough to help their four middle-aged children and their families.

While the couple enjoy a stable income, their children lead insecure lives that are common for the younger generation even when they have work.

Their son David, 40, fears he'll lose his job as a keyboard teacher when his state music school goes into private ownership later this year. His wife Raquel, 39, must reduce her hours as an administrative officer because her indebted employer, Spanish building and infrastructure company FCC, is cutting costs.

The retired couple help however they can from their tiny but cosy flat in working-class Villaverde, south of Madrid, which has barely changed since they bought it in the mid-1960s.

Slumped in his brown velvet sofa, Angel cuts out supermarket discount coupons from the newspaper. Vouchers, gasoline money, rent and babysitting are part of the aid he and 80-year-old Maria Luisa give their children every month.

Retired people account for 17 percent of Spanish households but finance twice as many. Italy is similar: pensioners' income rose 4.6 percent between 2008 and 2012, while that of workers on long-term contracts – the main type of employment – fell by the same amount. Four out of 10 Italians received financial help from their parents last year, according to a study by farmers' association Coldiretti.

In Spain, more than one out of four workers are unemployed, and the rate among under 25-year-olds outside education is a whopping 55 percent.

This income gap between old and young points to a chronic problem aggravated by the crisis: how to rebalance Europe's welfare systems to make them affordable and socially just.

One example: though Spanish state spending on pensions rose 18.2 percent in 2008-2012, that on education and healthcare dropped 8.1 and 0.1 percent respectively. This year, money for schools, hospitals and publicly-funded research is due to fall even further while pension costs keep rising.

The affluence of pensioners relative to their children and grandchildren has created a dependency that may hurt those now aged 30-40 for the rest of their lives.

"We're facing a generational time-bomb," says Alessandro Gentile, a professor of sociology at the University of Zaragoza.

As today's young are more likely than in the past to suffer unemployment or under-employment through their careers, their pensions will be lower. This means eventually they won't be able to cushion their own children financially. At that point, says Gentile, the model of family solidarity "will short-circuit".

VOTING BLOC

Pensions systems, the biggest component of state welfare expenditure in most of Europe, are hard to change overnight.

Many governments began tweaking their loss-making pension systems a decade ago and retirement ages have risen to reflect increased life expectancy. In Spain, for example, people will retire at 67 in 2027 compared with just over 65 this year.

Also, in many European countries a bigger share of contributions to state-run pensions is now paid by people while they work, rather than through taxes on working populations. Governments say this makes the system financially healthier.

Yet in most cases, the reforms don't take full effect until 2030 or even later. With pensioners forming an important voting bloc, this reflects political resistance to faster change.

Greece is the only country to have taken drastic action, forced to cut pensions by 30 percent between 2009 and 2013 under the terms of its international bailouts.

The economic crisis has also undermined reforms begun in the 1990s; with so many Europeans unemployed, there are not enough well-paid workers paying into the system to fund it properly.

"It is not sustainable with such a low level of jobs, with such kind of jobs with such low salaries," says Jose Carlos Diez, an economics professor at ICADE business school in Madrid.

For instance, Spanish unemployment is 25.9 percent while about 5 million people - or about 30 percent of the employed workforce - are on short-term or reduced-hour contracts and pay very little into the state pension system.

According to the European statistics office Eurostat, people aged 65 and more will account for 31.6 percent of the Spanish population in 2050 - up from 17 percent today - while the number of 25-64-year-olds will drop to 34.8 percent from 44.9 percent.

As a result, there will be 1.1 workers per pensioner in Spain, far less than the current 1.8. That is likely to mean years of red ink for the social security system, which posted an 11.8 billion euro deficit last year.

Prime Minister Mariano Rajoy is trying to plug the gap. Over the past two years, Madrid has financed the pension system with 16 billion euros out of a 70 billion euro special reserve fund. But the money will run out by 2020 unless new changes are made.

RABBIT AND POTATOES

Older generations in Spain, Italy and Greece regularly look after their grandchildren, and children are expected to take ageing parents into their homes. But not all pensioners can help financially without suffering hardship themselves.

One pensioner, also called Angel, supports three homes with the 1,600 euros he gets a month after 40 years working in German and Spanish car factories. He pays nearly 1,000 euros a month in two different mortgage payments for his daughter and son, who has two university degrees but cannot find a job.

"It's getting hard," said Angel, 68, who didn't want his full name published lest friends and acquaintances learn of his family's situation.

He and his wife have turned to eating frugal dishes common in the hard times that followed the Spanish civil war of the 1930s. "All our savings have vanished and we're back to eating rabbit with potatoes," he said.

Southern Europe's family safety cushion has also compensated for low state spending on other welfare services, such as universal unemployment benefits or care for infants and the elderly. As a percentage of gross domestic product, Italy, Spain and Greece spend far less on these services than northern European countries, according to the OECD.

When 40-year-old Renato Ghidoni lost his job at a small Italian asphalt company near Milan a year and a half ago, he and his family survived on unemployment benefits for about eight months.

Once the benefits stopped, Ghidoni, his unemployed wife Angela and their three children moved in with her ageing parents. They share the top floor of the house where Angela was raised with her 90-year-old great-uncle, while her parents – both retired - live below. The change has allowed the Ghidoni family to save around 800 euros a month in rent and charges, plus economize on food and other daily purchases.

"The children love it. We've had to adapt, but given the circumstances, we're grateful," said Angela.

Economist Jose Antonio Herce says that after years of austerity, southern European governments will be tempted to give people more money by cutting taxes. But he believes they should spend more on welfare for the active population, such as training to help people like Ghidoni find new and better jobs.

"We should take advantage of any financial breathing space to reduce the inequalities bred by the crisis," said Herce, a professor at Madrid's Complutense University and associate director at Afi, an economic advisory firm.

Only well paid work offers a long term solution for the younger generation facing the inevitability that the Bank of Mum and Dad won't supply funding for ever.

In Villaverde, Angel Gomez said he and his wife are there to help now but frets that his children, with their shaky employment situations, can't expect a pension as high as theirs.

"It's not getting any better," he said. "My kids will never get what I have."($1 = 0.7325 Euros)

(Additional reporting by Renee Maltezou in Athens, Nick Vinocur in Paris, Michelle Martin in Berlin and Andy Bruce in London, Editing by Alessandra Galloni and David Stamp)

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