pensions is that electric word, which makes one’s hair stand on end when heard in certain European capitals, especially in the south, and especially if pronounced by Brussels in these warlike days of inflation and uncertainty: “The linking of pensions to inflation will increase the spending on pensions ”, the European Commission warns Spain in the report published this Monday, in line with the fiscal recommendations of the Community Executive.
To try to placate the fury of prices, lit up after the pandemic and on fire since Russia planted its boots in Ukraine, Brussels calls on Madrid for “the introduction of compensatory measures that will have to be adopted in 2022 within the framework of the recovery plan” . Its inclusion is “necessary to mitigate the risks to long-term fiscal sustainability”, concludes the text released together with the so-called spring package for the European semester, which outlines a generally gloomy scenario for the EU economy.
The express mention of future risk also comes at a time when the Executive of the EU and that of Spain are groping at a technical level about the next steps to be taken in the reform of the pension system, within the milestones agreed to receive the multi-million dollar recovery and resilience plan disbursements; The result of this exchange is expected to be completed in 2022 and 2023.
Until now, the Spanish Executive has undertaken a first phase of the reform agreed with Brussels, among whose strengths is precisely the linking of the revaluation of pensions with the CPI, adopted by Congress in December 2021. And in it resides the problem: the clawing of energy prices, with the Russian president, Vladimir Putin, becoming the owner and lord of the handle of the gas pipelines that connect Russia with the EU, has become a real headache for those who try to square European accounts. Prices have been riding without a bridle since the beginning of the war: in April alone, year-on-year inflation in Spain stood at 8.3%, a figure that was still higher in March; and Brussels forecasts place it at 6.3% in 2022, more than double that registered in 2021 (3%).
In the second part of the reform, Spain must include other measures such as the contributions of the self-employed, the unstopping of contributions, an increase in the computation period to calculate the pension and, as planned, a mechanism already approved to replace the Factor of Sustainability and ensuring the financial health of the pension system, a point that raises doubts in Brussels.
“A reform of the pension system aims to improve its adequacy, while limiting the impact of demographics on fiscal sustainability,” says the report on Spain prepared by the Commission. The text maintains that by linking pensions to prices, the reform is expected to support purchasing power, but at the same time mentions additional measures that are “in the process of being implemented or adopted as part of a package to support general fiscal sustainability of the pension system.
He knows in depth all the sides of the coin.
Among them, the document adds, are mechanisms “to increase the effective retirement age, link contributions and rights more closely, reduce the gender gap in pensions, change tax incentives, modify the contribution system for self-employed workers, the extension of the reference period for calculating pensions and an intergenerational equity mechanism”. The latter is precisely one of the points of friction between Madrid and Brussels, as EL PAÍS advanced this Monday.
Brussels warns in its report that fiscal sustainability in the medium and long term will be affected “by the high level of debt and an unfavorable initial budget situation.” The Spanish public debt is around 118% of GDP, and the deficit that fuels this indebtedness closed last year at 81,500 million euros, the equivalent of 6.76% of GDP. The Commission considers that Spain has made a “sufficient effort” to reach its deficit reduction path throughout 2021, but sees it as “likely” that the debt ratio will grow and be higher in 2026 than in 2021, according to what is read in the recommendations of the European semester.
“The costs derived from the aging of the Spanish population will affect fiscal sustainability,” adds the report focused on Spain, which cites, in addition to pensions, other expenses such as health care. “As for pensions, the decrease in spending had been projected with the previous legislation,” the analysis concludes. “In this regard, the pension reforms included in the recovery plan must be carefully designed and implemented as a coherent package to ensure that they contribute positively to mitigating risks in the medium and long term.”
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