OECD Criticises Pension Reform; The Accounts Do Not Add Up

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The OECD criticises the fact that Spain is abandoning the system of automatic adjustment of the pension system – which used the so-called “sustainability factor” – to replace it with the so-called “intergenerational equity mechanism”. The latter involves a rise in social security contributions of 0.6% over 10 years, something that is not even equivalent to the costs of indexing pensions to inflation. According to the OECD, the “intergenerational equity mechanism” will be insufficient and will only raise 2.3 per cent of gross domestic product (GDP) over this period of time.

According to the European Commission’s calculations, the indexation of pensions to inflation alone – replacing Rajoy’s revaluation mechanism in the new reform – will lead to an annual cost overrun equivalent to 1.4% of GDP per year in 2030 and 2.6% of GDP per year from 2050 onwards. Hervé Boulhol, author of the report, points out that “new measures will be needed”. “In the 2040-2050 horizon there is a problem of resources” due to the rapid ageing of the population in Spain and this requires “structural measures”. According to Boulhol, a proposal is being made “for the medium term and there is no mention of what will happen afterwards”.

Spain is one of a minority of OECD countries (one third of the total) that do not have an automatic adjustment mechanism. “Automatic adjustment mechanisms have the advantage of defining the direction that schemes should take, knowing that a change of direction will at least require explanations and will expose compromises.

He acknowledges that the sustainability factor envisaged in the 2013 reform (which never came into force) worked as an automatic adjustment but had two problems. The first was that Mariano Rajoy’s government introduced it without the consensus that would have been necessary for such a mechanism to last.

In addition, it considers the pension revaluation index implemented by the Rajoy government to be “questionable”. This is because it had an impact on pensioners – who lost purchasing power in 2017 and 2018, when they could do little to increase their income.

The report flags that the income of the over-65s in Spain is equivalent to around 96% of the average income of the total population. And this is eight percentage points higher than in the OECD as a whole. Moreover, in Spain this ratio has grown by 11 points since 2000, which means that the income of the elderly has grown faster than that of the rest of the population.

According to the OECD, ageing “will now accelerate at a very rapid pace, putting severe pressure on financial sustainability”.In its comparative analysis it finds that the conditions for achieving a full retirement pension are “lax” when compared internationally. While in 2027, a worker can retire at 65 with a full pension if he or she has contributed 38.5 years, in France 43 years are needed, while in Germany 45 years are required.

In addition, the OECD has stressed that in most countries the total working career is taken into account when calculating the pension. In the EU, only France, Slovenia and Spain use a time horizon of 25 years or less.

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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.