Reasons why Aref believes that pension reform is unsustainable and what are its consequences

“The first in front.” This may be a quick headline from the analytical report published by the Independent Authority on Financial Responsibility (airline) This Friday on the impact of the pension reform approved a few days ago and which will come into force in January 2024. In general, the audit body estimates a significant increase in spending due to the revaluation of pensions with the consumer price index and a set of complementary measures, mainly aimed at to an increase in the income of the system, which will not be sufficient until the equilibrium resulting from the reform is neutral. Nothing could be further from reality. A new law sponsored by the Ministry of Social Security will increase the pension deficit and raise public debt to levels not expected in the middle of the century.

Overall and in the base scenario, which is the most feasible in the eyes of the IRS, it charts a course spend Increasing, mainly due to the revaluation of pensions with the consumer price index. He indicates that spending will move from the current 11.7% of GDP to 16.3% of the GDP in 2049, and then decrease in 2070 to about 13.9% of GDP. In other words, at a time of greatest fiscal pressure on Social Security – which will cause “baby boomer” retirement collapses in the coming years – the public budget will have to pay pensions 4.6 percentage points higher than GDP. Which is as much as saying that by then the annual bill will be an additional €55.200 million, which will be added to the more than 190.000 million payments in this heading that are currently being made, so that by mid-century the annual cost of pensions will already amount to about 250.000 million a year.

What is IREF and what is its role in pensions?

At this point, we must remember that the report provided by Airef on the impact of the measures approved by the government in relation to pensions is very valuable. Not bindingYes, so he does not force the government to implement new measures or amendments to the recently approved decree, but he assumes a collective opinion that, after that, it will have more weight in decision-making from 2025.

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It is customary, not in vain, to be the body whose main function is to audit public accounts. However, sources from the institution told the ABC that despite the lengthy documents that were published last Friday, they faced real difficulties when it came to condensing information from the government’s economic memory, and about some projections made by the executive branch.

However, the government itself is giving Airef a decisive role from now on in terms of pensions, as it will have to implement every three years From the year 2025 A.J analysis Similar to what has been revealed at this time, and based on these conclusions, the pension reform decree stipulates that the government undertake specific actions in line with the recommendations issued by Airef. And if this is not the case, it is expected that the intergenerational justice mechanism, which is one of the elements included in the reform and reinforced in this second package of measures, will be automatically activated with the associated contribution increase, which will be in 1.2% of salaries from 2029. .

How does Aarif conflict with the government?

At this stage, and in this central scenario, the Aeref forecast report is far from the estimates presented by the Council of Ministers of the Minister of Social Security, Jose Luis Escrivá. First of all, the government estimates that measures aimed at improving Social Security income that would cover the increase in expected spending with the increase in pensions with the consumer price index would add 1.1 percentage points of GDP in income from contributions once the transition periods of base and share increase Solidarity and intergenerational justice mechanism.

Here, Airef puts an approximate level of Earn incomebut factoring in the improvement projected by the new real income contribution system for the self-employed, adding a total of 1.3 points of GDP to social security coffers.

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So far, it seems that Aref and the government’s expectations are close. The executive branch estimates a similar level of income and an approximate level of expenses, although they do exist At a point where expectations are far off. Specifically, the key lies in the divergence in savings estimates due to the lengthening of the effective retirement age, through early retirement reform and new incentives for late retirement. Indeed, Social Security already knows it will be the only means of adjusting spending, but the calculations of how much the system can save are far from stable.

Indeed, Social Security technicians recognize that pure collection measures are insufficient to cover the increase in expected spending and trust more than one point of spending savings inExtending the effective retirement age, who is about 64 and a half years old, according to another study by the Bank of Spain. And this is where Airef puts its foot on the wall, although it is accepting savings due to delays in some exits from the labor market – they estimate that 30% of future retirees could get a pension by age 68 – which could be as low as 0.8% but tightening processes Early withdrawal becomes null and void.

«The main factor in the increase in pension spending is populationWhile institutional factors and labor market factors adjust this growth throughout the entire projection horizon, ”the report states. The downward pressure on spending exerted by institutional factors and labor market factors is increasing until 2050 due to the full implementation of the 2011 reform, due to the delay in the retirement age that It is strengthened by the 2021 reform and due to the reduction of the maximum pension in real terms.Derived from the 2022 reforms.“After 2050, it can be observed how demographic pressure begins to decline, limiting the contribution of this factor to the growth of pension spending to GDP” Arif explains.

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In addition, there is a wide margin of uncertainty regarding the future development of the impact of reforms and other factors. A hot example is the effect of incentives on late retirementwhich depends on changes in the behavior of all agents,” the text warns.

after the report

In the first place, as we mentioned, the report presented this week is not binding, but it is relevant. It is not surprising that the watchdog responsible for assessing the progress of reform every three years, for which it should become Other adjustments or increases in contributions To balance the scores, a cautious first opinion has already been issued with few guarantees in sight. Indeed, it concluded that in terms of sustainability, the measures adopted, far from helping to ensure it, would increase the system’s fiscal imbalance by as much as 1.1% of GDP by 2050.

And second, we must remember that Airef evaluates and recommends the government based on its audits of the accounts. But he is coming Brussels exam The next stage begins in the spring and it will carry out comprehensive control over the impact of the measures. The arrival of the fourth tranche of financing of European funds corresponding to Spain, in the amount of 10,000 million euros, will depend on the outcome, favorable or not. This first analysis appears with multiple caveats about the impact of pension reform clouding rather than clarifying the work of the analysis and the conclusions that the European Commission must implement.

In addition, if the scenario does not improve significantly in the next two years, Airef’s first analysis can really open the door to New price increases Through the intergenerational justice mechanism, one of the procedures provided for in the reform and with this financial scenario to get a little closer.

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