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Brussels raises doubts to Spain about the pension reform | Economy

The Vice President of the European Commission, Valdis Dombrovskis (L), and the Commissioner for the Economy Paolo Gentiloni (R).
The Vice President of the European Commission, Valdis Dombrovskis (L), and the Commissioner for the Economy Paolo Gentiloni (R).STEPHANIE LECOCQ (EFE)

Doubts abound in Brussels about the pension reform approved by the Government at the end of 2021, to the point that it could jeopardize future disbursements of European funds. The European Commission assures that the next payment, of 12,000 million euros, can be made without inconvenience. But community sources warn that the discrepancies on pensions must be resolved before proceeding with the delivery of funds at the beginning of next year. Brussels’ fears focus on the approved mechanism to replace the Sustainability Factor and ensure the financial health of the pension system, admit sources in Madrid and in the community capital. This debate has largely taken place at a technical level. On a political level, these sources recall that the Commission has its attention focused on measures to achieve energy independence and to prevent another recession in Europe due to the war in Ukraine. However, they acknowledge that the pension issue could make talks difficult. In fact, the disbursement of the 12,000 million that is due now has already been delayed by several months in part due to this tug-of-war.

The scrutiny has increased. Madrid and Brussels have held a technical debate in recent months. According to these sources, the Commission had even proposed evaluating this instrument, officially called the Intergenerational Equity Mechanism. In other words, advance the assessment of this part of the reform to the examination of the milestones that must be met to receive the 12,000 million of the second disbursement of European funds, which is being carried out these weeks after Spain’s request. And this despite the fact that the commitment between both parties when the plan was approved was to evaluate it with the fourth payment, that is, at the beginning of 2023. At the insistence of Brussels, the Government replied that the review should be done when appropriate and that This aspect of the reform could be assessed without having completed the rest, which is currently being negotiated with the social agents. In the end, in these technical conversations the opinion of the Spanish Executive has prevailed. And this has been pointed out by the European Commissioner for the Economy, Paolo Gentiloni, who recently pointed out in the European Parliament that the sustainability of pensions “will be examined in the following requests” for funds from the recovery plan. The disbursement of the second installment of European funds, which amounts to 12,000 million, is not in danger, sources in Brussels clarify.

From the Ministry of Inclusion, Social Security and Migration they maintain that the conversations with the technicians have been continuous and productive so that they can understand the nature and content and appreciate the coherence of the set of reforms. “They have not transmitted any concern to us either about the reform as a whole or about any of the specific measures. On the contrary, the proposed reforms have been supported at all levels, as Commissioner Gentiloni’s words last Monday show,” they argue.

In any case, the evaluation of the pension reform must be done when all the measures are in place.

Second part

What has been approved so far includes the linking of pensions to the CPI, the transfer from the State for the so-called improper expenses, the changes in the penalties for early retirement and the improvement of the incentives to retire beyond the legal retirement age. And this is finally sticking to the analysis of Brussels. The second part will include the contributions of the self-employed, the stoppage of contributions, an increase in the computation period to calculate the pension and, as initially planned, the mechanism already approved.

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The debate between the Government and the Commission has focused on the new Intergenerational Equity Mechanism, which replaces the so-called sustainability factor approved by the PP and which has never been applied. The latter reduced the initial pension based on the increase in life expectancy, that is, the greater the probability of living more years, the lower the initial benefit with which the retiree retires. The formula had the objective of contributing to the financial sustainability of Social Security and yielded savings of around one point of annual GDP for 2050. The idea was that it implied an automatic adjustment of spending without any political decision, as long as the streets will not be filled with people protesting as happened in 2018. Then, faced with pressure from pensioners, the Rajoy government agreed with the PNV to suspend its planned entry into force for the following year. For its part, the new Intergenerational Equity Mechanism implies a rise in contributions of 0.6 percentage points between 2023 and 2032, which represents an annual saving of 0.2 points of GDP that will be allocated to the Reserve Fund. And it is left open for more adjustment measures to be taken within a decade if necessary, agreeing with the employers and the unions.

To determine if it is necessary, from 2033 the evolution of spending will be monitored every three years taking as a reference the disbursement in pensions over GDP forecast by the Aging Report of 2024, a report with demographic forecasts and its impact on the public coffers of the European countries. If the disbursement forecast for 2050 exceeds that reference, once the effect of the suppressed Sustainability Factor is subtracted, then the Reserve Fund will be used. If this is not enough, the Government of the day and the social agents will have to negotiate the necessary adjustments. The abolition of automation is what has upset Brussels, something that the Spanish Executive justifies with the argument that this way it gains social and political support for the changes and avoids the example of what happened with the 2013 reform, which did not had that support and has ended up repealed.

The discrepancy is also found in the forecasts on how pensions will evolve in relation to the economy. In the community capital, the sustainability of the Spanish public accounts is causing concern, especially at a time when the cycle of interest rates is beginning to change. They suspect that the calculations of the Spanish Government are very optimistic, an attitude that, on the other hand, is common among community officials with all Executives. Although this time it is shared with other public and private bodies.

For example, the Bank of Spain has just stated that additional measures will be needed on the expenditure side, income or both. At the end of last year, in the Senate, Governor Pablo Hernández de Cos said that re-linking pensions to the CPI and suppressing the Sustainability Factor would cause annual spending on pensions to increase by about 4 points of GDP between now and 2050. , more than 50,000 million today, the equivalent of half of what is collected by personal income tax. And he concluded that the proposed measures barely counteracted that: “Add and subtract,” he told the senators present. Faced with these statements, Minister Escrivá has declared that the numbers of the Bank of Spain are “unsophisticated”.

The period for calculating the pension

Apart from the income for the self-employed and for unstopping contributions, the extension of the calculation period to calculate the pension meant savings for the system and, therefore, a cut in benefits if the calculation years were extended from 25 to 35 as proposed initially the Ministry of Social Security. But for some time now, this department has insisted that the best years of the working career will be allowed to be chosen and that the system will be reinforced to integrate contribution gaps, which in the end would mean that this formula would not provide as many savings, as it is recognized in the reform document sent to Brussels with the Recovery Plan. “In general, this measure increases the contributory nature of the system but it can have negative effects, so it is important to complement it with measures that modulate its effects, such as the possibility of choosing years or improving the contribution gap integration system,” said the paper in which he outlined this reform to Brussels, the so-called component 30.

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