Articles Originally Presented at the Eiss Conference on Federalism and Subsidiarity in Social Security in Rome, September 2004: Old-Age Benefits and Decentralisation: The Spanish Case in Comparative Perspective

AuthorJesús Ruiz-Huerta Carbonell,José M. Díaz Pulido
Date01 December 2004
Publication Date01 December 2004
´s Ruiz-Huerta Carbonell and Jose
´M. Dı
´az Pulido*
The decentralisation of social security in general, and old-age pensions in
particular, has been proposed by several nationalist parties in Spain. The purpose
of this article is to analyse the rationality of this proposal, taking into account
efficiency and equity issues. It is divided into four sections. The first introductory
section reviews the most important literature on fiscal federalism, applying it to
pensions. The second section analyses the division of competencies in Spanish old-
age benefits, focusing specifically on legal aspects. The third describes the degree of
decentralisation of public transfers for the elderly in several countries: Belgium,
Canada, Germany, the United States and the United Kingdom. The final section
evaluates the current Spanish system, considers the possibility of decentralisation in
the light of economic efficiency, territorial equity and lessons learnt from other
federal countries, and examines the evolution of the principal quantitative
variables regarding the old-age pensions in the different Autonomous Regions.
In order to evaluate the current system and the possibility of decentralisa-
tion of old-age benefits in Spain, it is necessary to refer to the theory of fiscal
federalism, which is the main economic theory regarding decentralisation of
European Journal of Social Security, Volume 6 (2004), No. 4 299
´s Ruiz-Huerta Carbonell is Professor in Public Finance and Political Economy at Universidad
Rey Juan Carlos, Madrid and Director of the Instituto de Estudios Fiscales (Institute for Fiscal
Studies) Avda. Cardenal Herrera Oria, 378 28035 Madrid Spain, e-mail: jesus.ruizh@ief.min- Jose´ Manuel Dı´az Pulido is a Researcher in Applied Economics at Universidad Rey Juan
Carlos, Madrid and at the Observatory of the Agency of Employment of Madrid City Council,
Paseo de los Artilleros s/n 28032 Madrid, e-mail: They both wish
to thank the EISS, for providing them with the opportunity to present an earlier version of this
article at the annual conference, Marina Blinova (University of London) for her research on
comparative systems, Juan Pardinas (London School of Economics) for his help in the
introduction to fiscal federalism theories and Alex Wilks and Liliana de Marco (University of
Essex) for proof-reading the paper presented at the EISS conference. They also wish to
acknowledge the expertise of Prof. Danny Pieters and Dr. Steven Vansteenkiste, who provided
the incentive to study the decentralisation of pensions in other federal countries.
300 Intersentia
public policies. Both topics, old-age pensions and decentralisation, have
attracted growing attention in economic research. Nevertheless, the
interaction of these topics (the decentralisation of old-age benefits) has
only been addressed by a few articles in the Spanish and international
literature. The aim of this paper is to bring some economic thinking to a
complicated issue, which is currently being debated in Spanish politics.
1.1. Efficiency
1.1.1. Arguments in favour of decentralisation Classical theory
The classical theory of fiscal federalism was originally developed in the late
fifties by public finance economists such as Musgrave (1959), Stigler (1957)
and Tiebout (1956), amongst others. These authors used welfare economics
theory to analyse the consequences of decentralisation of public policies for
efficiency and equity.
From this point of view, economic efficiency seeks to ensure that there is no
reallocation of society’s resources which can make someone better off
without making anyone else worse off
(Pareto criterion). The most famous
model of this theory is that formulated by Tiebout (1956). It states that the
ability of individuals to move among jurisdictions produces a market-like
solution to the ‘local public goods’
problem. This model is usually called
voting with your feet, and is based on strong assumptions about rationality,
mobility costs and perfect information. Tiebout’s essential idea is the
extrapolation of benefits of the invisible hand perfect competition to the
public sector.
It follows that rational public agents engage in competition,
tailoring local policies and searching for efficiency to maximise the welfare
of mobile citizens.
Tiebout’s model has been criticised for being of an exclusively American
construction. It is therefore not applicable to European reality, as a result of
the higher costs of mobility (language and cultural barriers). However, as
Oates (1999: 1124)
notes, this principle does not need mobility to produce
´s Ruiz-Huerta Carbonell and Jose´M.Dı´az Pulido
For a general description of efficiency applied to decentralisation, see Inman and Rubinfeld
Local public goods are defined as goods whose benefits are limited to those citizens living in a
locality (Stiglitz, 2002: 733).
However, this model needs much stronger assumptions than the perfect competition model.
Oates (1972) formalised this argument in two principles: the Correspondence Theorem and
the Decentralisation Theorem, which claim that decentralised provision of a local public
good will be more efficient if the preferences among jurisdictions are heterogeneous. This
principle has been criticised (Casahuga 1982) because it supposes that a centralised
gains in welfare. In fact, it functions even with individuals and factors which
are completely immobile. As long as different communities have different
preferences about combinations of public goods, a decentralised solution
will be Pareto-superior to a centralised one. The main idea in classical fiscal
federalism is that local governments can tailor public policies to local
preferences and needs. Other classical formulations of this principle are the
Stigler principle
and the subsidiarity principle.
The main problem of applying the classical theory to pensions is that, for
this theory, the decentralisation benefits concentrate on the public sector’s
task of allocating resources. When it comes to the redistribution of income,
it prescribes that central government should retain the main competencies,
because of the existence of externalities and the possibility that local
governments will compete to attract capital and wealthy citizens. Innovation and ‘laboratory federalism’
Many supporters of decentralisation argue that it creates the positive effect
of innovation in public policies. The main idea is that local governments are
more flexible than central governments in responding to social needs in a
context of imperfect information and ‘learning by doing’. Therefore, sub-
central states act as ‘laboratories’
, experimenting on a small scale with
innovative policies, that, if successful, can be disseminated elsewhere. The
innovation process is developed first in regions which face greater needs,
e.g. regions which have a higher proportion of elderly people in their
population. Again, the theory is controversial about this matter. In fact, it
has been argued, from a rational behaviour model
, that local states could
face a free-rider problem concerning innovation, because of the problem of
externalities. Another drawback of this argument is that a centralised state
can also develop new policies affecting only a small part of the territory as a
‘laboratory’ and can extend these if the results are successful.
Old-Age Benefits and Decentralisation
European Journal of Social Security, Volume 6 (2004), No. 4 301
government cannot provide different levels of public services and taxes in different
territories, according to local preferences. However, we believe that even though it is possible
for a central administration to do so, central governments face many constraints to providing
different levels of taxation and benefits within their jurisdiction.
Stigler (1957) formulated the following statement: ‘representative governments work best the
closest it is to its constituency and subsets of people have the right to vote different kinds and
amounts of public services’.
The subsidiarity principle derives from the merging of many traditions (anarchist, liberal,
Christian, etc.) but was extensively promoted by the Catholic Church. In fact, one of its most
quoted formulations comes from Pope Pius VI. Good discussions of this origin can be found
in Puljiz (2002) and Inmand and Rubinfeld (1998).
This term is thought to come from the US Justice Brandeis back in 1932: ‘It is one of the
happy incidents of the federal system that a single courageous state may, if its citizens choose,
serve as a laboratory; and try novel social and economic experiments without risk to the rest of
the country’.
Models of this kind have been developed by Rose-Ackerman and Strumpf (Oates 1997: 1133)

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