The Government closed this week the agreement with the social agents to approve the first phase of the Spanish public pension system. The pact includes the revaluation of payments based on inflation, the reform of early retirement and incentives to delay retirement, in addition to the separation of sources of financing from Social Security to transfer the so-called improper expenses to the Budgets Generals of the State and the repeal of the pact of sustainability of pensions approved by the PP in 2013, but parked until 2023.
Until then, it seems a remarkable advance on the book of measures that the Spanish Executive has committed to Brussels in the matter of pensions as condition for receipt of European funds for reconstruction.
However, starting to assess the impact of the agreements reached at the social dialogue table with employers and trade unions, a result that is far removed from the recommendations and demands made in this area from the European Commission.
In its latest indications substantiated in the form of specific recommendations for Spain, the idea of reducing the replacement rate of the public pension, which is around 80% in our country, was abandoned and bringing it closer to levels more similar to those of the EU members, to simply urge the Government to carry out a reform that would make the public system fully sustainable, which after the last financial crisis had been registering annual deficits of around 1.5% of GDP.
And on this premise of rebalancing Social Security accounts, it does not seem that the first leg of the reform sealed this past month implies a downward spending path. Quite the opposite,
In fact, the Executive assumes that spending for linking the revaluation to the CPI will raise spending by 2.5 percentage points of GDP in the medium term. And that this increase would only be compensated to a certain extent and also in the medium term by the increase in the effective retirement age, where half of the increase in expenses expected by indexation could be cushioned.
Quoted period for the calculation
Therefore, the true pension reform, in terms of moderation in the increase in the annual bill, will arrive in 2022 with the assumption of measures that may imply fluctuations in the initial amount of future retirement payments, such as the increase in contribution period for the calculation of the pension that currently takes the last 25 years.
In fact, this was the touchstone that led the Government to guide the reform in two phases and leave the thorniest aspects of the reform for that second phase. According to a draft on this measure that was leaked to the media and that the Executive denies having been working on it, the increase in the years quoted for the calculation of the pension from 25 to 35 years was foreseen, which would mean an average cut of 6% in the initial pension.
Now the Ministry of Social Security maintains the intention of addressing this part of the reform from 2022. And it seems that the measure will be substantiated in these terms, those of increasing the calculation period as suggested by the Toledo Pact, although the details of the level that this increase will reach are not yet known.
Although the Executive will try to cushion the eventual reduction of the benefit -mainly for those who start their working career with precarious salaries, who gain weight in the calculation of the benefit- with the compensation of contributions not contributed in certain periods of cessation of activity . That is, the gaps in contributions during the working career.
Intergenerational equity factor
The first contact on the thorniest and most complex issues to agree on will come this autumn with the negotiation of the new intergenerational equity factor that will replace the PP sustainability factor, but which will also take into account for the pension the expectation gain of lifetime.
The Minister of Inclusion, Social Security and Migration himself, José Luis Escrivá, had to go out of his way this week since in the same act of signing the first package of measures, he slipped that this new mechanism would mean that the baby boom generation will have to choose between receiving a little less pension or extending their stay at work if they wanted to avoid that decrease.
Although the minister also assures that the measure would never imply cuts in benefits such as those foreseen in the previous sustainability factor , which initially included cuts of 3% in the amounts of 2019 retirements. These cuts, for future retirees of our country could have risen up to 20%.
However, the measure was suspended until 2023 and despite the fact that the new intergenerational equity factor should be negotiated at the social dialogue table before November 15 of this year, it would not enter into force until next 2027 either.
In this sense, several experts end up on the question of the Government’s negotiating strategy for this reform, since the elements introduced in the first package, which will raise total pension spending in the medium term, is only half of the set of measures necessary.
And furthermore, it is half of the measures that are easy to agree on. Therefore, experts warn that this second consensus could be difficult for the second package, which will be more pointed.