Bank Of Spain Insists That Measures Are Lacking To Ensure The Sustainability Of Pensions

The Bank of SpainPablo Hernández de Cos, Bank of Spain's governor

The governor of the Bank of Spain, Pablo Hernández de Cos, has reaffirmed his calculations on the pension system after the Minister of Social Security, José Luis Escrivá, described them as “unsophisticated”. He once again argued that the measures proposed are not enough to ensure sustainability once pensions have been linked to inflation and the sustainability factor has been eliminated: “If you add and subtract, there is a gap that has to be covered,” he said in an appearance in Congress on Wednesday. However, he pointed out that we will have to wait for the second part of the pension reform to see if more measures are needed.

The governor also insisted that pensioners and civil servants should participate in the income pact to moderate wage increases and avoid an inflationary spiral due to a loss of income produced by energy bought from outside. In part, this must be done because of the need to bring public finances back on track. A gradual, medium-term plan is needed to bring down the structural deficit. If nothing is done, public debt will rise beyond the current high levels due to the ageing of the population, warned the Bank of Spain governor.

Following the Social Security Minister’s criticism, Hernández de Cos explained that in the coming years there will be a significant increase in the retired population in relation to the working population. And that this will generate high pressure on the pension system. The 2013 reform covered part of this increase in expenditure, he pointed out. But he admitted that this was done at the cost of significantly lowering the average pension in relation to the average contribution: “In other words, generosity was reduced. This was not politically viable”. That is why benefits have been linked again to the CPI.

However, the governor has stated that revaluing pensions in line with inflation and the repeal of the sustainability factor will mean a sharp rise in spending levels: between now and 2050 it will mean an increase in annual outlays of between 3.2 and 3.5 GDP points. In other words: an increase of more than the current 40 billion euros, the equivalent of more than 40% of what is collected in personal income tax.

The sustainability factor, which was abolished in December, automatically reduced the initial benefit according to the increase in life expectancy. Although it was approved by the PP government, it was never applied. According to the calculations used by Hernández de Cos, prepared by the Fiscal Authority and the European Commission, this formula could have brought about one point of GDP savings. Moreover, linking benefits to the CPI will lead to an increase in outlays of about 3 GDP points. Adding these two factors together, the 3.5 points of GDP that the governor is talking about is reached.

On the other hand, according to Hernández de Cos, the Executive has approved the so-called Intergenerational Equity Mechanism and the incentives for delayed retirement, which, according to official estimates, could compensate between 1.9 and 2.4 GDP points.

However, the governor has pointed out that much of this saving offered by the Intergenerational Equity Mechanism depends on a parliamentary agreement from 2032 onwards, it is not an automatic adjustment. This mechanism provides around 0.2 GDP points per year in contributions until 2032. After that year, it will have to be assessed whether further measures are needed, up to 0.8 GDP points per year. This lack of automatism is what Cos criticises.

He also explained that “there is considerable uncertainty about the effects of the new incentives for delayed retirement”. In other words, they might not give the predicted returns. All the more so when one takes into account that the Executive’s calculation in its low range of forecasts envisages that 40% of new retirements would be delayed by an average of three years. In the upper range, 50% of the self-employed and 60% of the general regime would delay their retirement age by an average of three years.

In any case, more than one point of GDP would be missing to compensate for the undoing of the 2013 reform. “If you add and subtract, there is a gap to be covered. And there remains what the 2013 reform did not cover. More measures are therefore needed to balance the system in the long term”, he insisted. And he recalled that the development of occupational pension plans, the review of the maximum contribution bases, a new contribution system for the self-employed and a review of the period considered for calculating pensions are still pending approval. “We will have to wait to see if these measures are sufficient once they have been approved”, he concluded.

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