19 de marzo de 2018
English Training Club

The pensions´ adjustment will continue for several decades, according to economists

De la Fuente and other researchers from Fedea advise "safeguarding" the lowest compensations by updating them according to the CPI

19.03.2018 | 08:58

Spanish pensions will lose purchasing power "for several decades" with the application of the revaluation index that since 2014 replaces the mechanism that previously preserved the purchasing power of retirees by raising their payrolls as inflation increased. An analysis signed by the economist Ángel de la Fuente, from Asturias, and two other researchers from the Foundation for Applied Economics Studies (Fedea) argues that the pension reforms of 2011 and 2013 favour the "sustainability" of the system in the long term, but their main negative effect, argues this group of experts, will be a strong loss of purchasing power and, therefore, of the real income of pensioners. De la Fuente and his colleagues bet, as a palliative measure, on "safeguarding" the lowest compensations, updating them according to prices.

The work is signed by Ángel de la Fuente (also director of Fedea), Alfonso Sánchez, professor at Cunef and the Complutense University of Madrid, and Miguel Ángel García Díaz, professor of the Rey Juan Carlos University. It consists of a long-term projection (period 2016-2070) on the financial health of Social Security and the risk factors. Some of the calculations and conclusions are summarized in the following points.

Reforms. The analysis starts from a demographic and economic scene (productivity, employment and inflation growth) analogous to the one used by the European Commission in its own studies. "Under this scene, the reforms of the pension system put in place by the last two Spanish governments (PSOE and PP) would be enough to contain the level of spending during the coming decades, maintaining it at levels that do not pose serious sustainability problems", the authors write. At the same time, the income of the contributory pension system (social contributions) would remain at levels below 9.5% of GDP, remaining for a long time at levels below expenditure. Here comes the problem of revaluation: as the mechanism approved in 2013 - and whose repeal is requested by organizations of pensioners who have mobilized and most of the political opposition - prevents raising the pensions more than 0.25% when there is a deficit in the Social Security accounts, the situation described "will result in freezing of pensions for several decades once they have been granted".

Side effects. "Therefore, until the sixties pensions would grow at an annual rate of 0.25%, well below the expected inflation (2% on average), with the consequent loss of purchasing power over time for the pensioners ", the report states. How big would that loss be? Considering that the life expectancy after 65 years is of two decades, it is estimated that an average retiree will lose 30% of his purchasing power due to the 2013 reform.
The one of 2011 consisted of a gradual increase of the legal age for retirement, until reaching 67 years in 2027, and in extending, also gradually, from 15 to 25 years the period of the working life that is taken into account to calculate the regulating basis on which the amount of the pension of new retirees is determined. This reform will reduce expenses and will have an impact for future pensioners that the European Commission has defined as follows: the initial pension, which until now averaged almost 80% of the last salary, will fall to 60% in 2030 and will be less than 50% in 2050. However, Fedea economists think that thanks to the expected increase in productivity that cut will not be so aggressive for the income of retirees. But this will depend on the quality of the economic growth and on it becoming an effective increase in salaries.

Palliative measures. The economists of Fedea are against getting rid of the reforms of 2011 and 2013. "If the existing system had remained unchanged before 2011 (with retirement at the age of 65 and pensions updated with inflation, among other things), according to our forecasts, pension spending would reach almost 21% of GDP in the early fifties". This means that the expense would double the current one in relation to the national wealth. Financing with taxes the 5.3 annual GDP points that, according to this argument, are saved with the reforms would require an effort equivalent to increasing the average rate of personal income tax by 70%, "and crossing our fingers so that the measure does not have effects adverse effects on employment and production, which seems highly unlikely", according to De la Fuente, Sánchez and García.

The report supports the maintenance of the reforms and discourages, in particular, the return to the rule that updated pensions according to inflation, central request of the mobilizations of retirees and parties of the left. The study recognises that for a part of the pensioners, those who have lower benefits, the loss of purchasing power "is a serious problem that will surely require taking palliative measures with some haste". Among the possible options, the Fedea team bets on "safeguarding the minimum pension". It would mean that the lower pensions (usually under 800 Euros) would rise in value according to the variation of the life cost, but not the rest of them. The cost, "acceptable" according to the report, would be equivalent to raising the income from the personal income tax by 5.8% per year.

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