The governor of the Bank of Spain, Pablo Hernández de Cos, has reaffirmed his calculations on the pension system after the Minister of Social Security, José Luis Escrivá, called these “unsophisticated”. He has defended once again that the measures proposed are not enough to ensure sustainability once pensions have been linked to inflation again and the sustainability factor has been eliminated: “If they add and subtract, there is a gap that must be covered”, He assured in an appearance this Wednesday in Congress. However, he has recalled that we will have to wait for the second part of the pension reform to see if more measures are needed.
The governor has also insisted that pensioners and civil servants must participate in the income pact to moderate wage increases and prevent an inflationary spiral from a loss of income produced by energy purchased from abroad. In part, this must be done due to the need to redirect public accounts. A gradual and medium-term plan is needed to reduce the structural deficit. If nothing is done, the public debt will rise beyond the current high levels due to the aging of the population, the governor of the Bank of Spain has warned.
After criticism from the Minister of Social Security, Hernández de Cos explained that in the coming years there will be a significant increase in the retired population in relation to the working population. And that this will generate a high pressure on the pension system. The 2013 reform covered part of that spending increase, he has pointed out. But he has admitted that this was done at the cost of significantly lowering the average pension with respect to the average contribution: “That is, generosity was reduced. That was not politically feasible” And that is why benefits have been linked again with the CPI.
However, the governor has stated that revaluing pensions again with inflation and the repeal of the sustainability factor will imply a sharp rise in spending levels: between now and 2050 it will mean an increase in annual disbursements of between 3.2 and 3.5 points of GDP. In other words: an increase of more than 40,000 million euros today, the equivalent of more than 40% of what is collected by personal income tax.
The sustainability factor, which was abolished in December, automatically lowered the initial benefit based on the increase in life expectancy. And, although the PP government approved it, it was never applied. According to the calculations used by Hernández de Cos, drawn up by the Tax Authority and the European Commission, this formula could have contributed close to one point of GDP in savings. Furthermore, linking benefits to the CPI will entail an increase in disbursements of nearly 3 points of GDP. Adding these two factors, we arrive at the 3.5 GDP points that the governor is talking about.
International Equity Mechanism
He knows in depth all the sides of the coin.
On the contrary, according to Hernández de Cos, the Executive has approved the so-called Intergenerational Equity Mechanism and the incentives for delayed retirement, which could compensate, according to official estimates, between 1.9 and 2.4 points of GDP.
However, the governor has pointed out that a good part of these savings offered by the Intergenerational Equity Mechanism depends on a parliamentary agreement from 2032, it is not an automatic adjustment. This mechanism provides about 0.2 points of GDP per year in contributions until 2032. And from that year it will have to be assessed if more measures are needed up to 0.8 points of GDP per year. This lack of automatism is what Cos criticizes.
In addition, he explained that “there is considerable uncertainty about the effects of the new incentives for delayed retirement.” That is, they might not give the predicted returns. Especially when taking into account that the calculation of the Executive in its low forecast band contemplates that 40% of retirement registrations would take an average of three years. At registration, 50% of the self-employed and 60% of the general regime would delay their retirement age by an average of three years.
In any case, more than one point of GDP would be missing to compensate for the 2013 reform being undone. “If you add and subtract, there is a gap to cover. And there remains what was not covered by the 2013 reform. Therefore, more measures are necessary to balance the system in the long term”, he insisted. And he has recalled that the development of employment pension plans, the review of the maximum contribution bases, a new contribution system for the self-employed and a review of the period considered to calculate the pension are pending approval or specification. “We will have to wait to see if these measures are sufficient once approved,” she concluded.
Regarding the extension of the calculation period, the Ministry of Social Security says that they will be allowed to choose the best years and integrate gaps in their career, so that people who have had interruptions do not lose pension for it. If so, then the adjustment would be quite minor. The problem that Minister Escrivá will have is that he has the European Commission asking for more in this regard, but there is no parliamentary majority or support from the social agents to make these initiatives generate substantial savings.
Growth and income pact
On the other hand, the governor has recalled that the economic recovery from the pandemic is being incomplete and uneven by sector. The delay with respect to the rest of Europe is mainly due to productive specialization. And the measures that were taken, the ERTE and the ICO guarantees, have been very effective. Not so much the direct aid, which has not been able to significantly alleviate the capital losses of SMEs due to the conditions that were set to access them, he has pointed out.
Hernández de Cos has highlighted the impact that the war in Ukraine is having on energy prices. And that the unfavorable GDP data for the first quarter will cause the growth forecast to be revised somewhat downwards, although there will still be a positive evolution of activity that will lead to a recovery of pre-pandemic levels at the end of 2023. The bank will also address a downward revision of inflation, in part due to the new mechanism to cap gas prices in the electricity market. Price increases are also having an unequal impact across sectors and countries, depending on sectoral specialization and dependence on foreign energy. And there is a lot of heterogeneity in the way it impacts sectors and families: “Low-income households suffer up to one point more from inflation than high-income ones due to the composition of their shopping basket,” he underlined.
Although inflation will remain high for a few months, the bank’s forecast is that it will fall later as long as there is no other energy shock or salary increases that feed inflation. For this reason, Hernández de Cos has requested an income pact that avoids it.
Regarding economic policies in this context of uncertainty, the governor recommends that there be no generalized fiscal impulse, but measures that are highly focused on the groups most vulnerable to price increases. In this sense, he has expanded on the idea that the revaluation of pensions and civil servants’ salaries should be incorporated into the income agreement. This pact should be made “to avoid an inflationary spiral that would aggravate the harmful effects of rising energy prices,” Cos defended. And he has added that it is “an inevitable decrease in national income” due to the increase in the prices of energy raw materials, which must be distributed over several years between workers and companies.