Fedea warns: pension reform “renounces any savings and will increase spending”.

pensiones playita

The Fundación de Estudios de Economía Aplicada (Fedea) warned on Monday that the pension reform that is under way “condemns the contributory component of the public pension system to a basic deficit (before transfers) that will be “high and rapidly increasing over the coming decades”.

After analysing the pension reforms as a whole (those already approved and the final phase that is now being negotiated), Fedea calculates that around 2050 extra resources of around 4.5 points of GDP would have to be injected into the Social Security system each year, which would represent around 60% of income tax revenue, which in 2019 was 7.56% of GDP.

According to the announcement, Fedea points out that the maximum Social Security contribution bases will experience a cumulative increase of 38% in real terms (after adjusting for inflation), while maximum pensions will undergo a “quasi-freeze”, as their cumulative rise until 2050 will be 3.15%, both increases measured at constant prices.

Fedea states that the main measures adopted in the first phase of the pension reform (indexing pensions to the CPI and abolishing the sustainability factor) will generate a “sharp increase in pension spending over the coming decades without affecting contribution income”. In fact, it points out that, according to the government’s own estimates, the increase in pension expenditure and, therefore, in the ordinary deficit of the contributory system generated by these measures will be around 3.5 points of GDP in 2050.

Fedea points out that, in principle, the second part of the reform, currently under discussion with the social partners but already endorsed by Podemos and the European Commission, “should have served to close the bulk of this gap, thus ensuring the sustainability of the pension system”.

In practice, argues Ángel de la Fuente, director of Fedea, the compensatory measures adopted so far are “clearly insufficient”. With the dual model for calculating the initial pension (25 years of contributions or 29 years excluding the two worst years) “not only will any savings derived from extending the calculation period be renounced in practice, but expenditure will also increase”, as only those who stand to receive a higher pension will opt for the longer calculation period.

Therefore, he concludes, “the current reform condemns the contributory component of the public pension system to a high and rapidly growing basic deficit (before transfers) for decades to come”.

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