The former minister’s pension reform Jose Luis Escriv condemn Espaa to be in the next decades the country of the European Union that has to allocate a higher part of its Gross Domestic Product (GDP) to the payment of the pensions public, and 16.7% in the year 2070, according to the Aging Report published this Friday by the European Commission. Before this rule was approved, Brussels calculated that that year there would be 16 countries with more spending on pensions than Spain, for which it predicted a ratio of 10.3%.
This expected increase in public spending is mainly due to the approved measures and, especially, the annual revaluation of all public pensions in accordance with the inflacin -which has forced pensions to rise by 8.5% in 2023 and 3.8% in 2024-. These increases are consolidated and generate a snowball effect in Social Security accounts. Although it was Escriv who put this shielding of pensions into law so that they would not lose purchasing power in the future, he did it for mandate of the Parliamentary Committee of Pact of Toledo, in which all parties agreed to entrust the Government of the day to do so.
“The Commission defends the maintenance of the purchasing power of pensioners, its guarantee by Law and its preservation (…) Pensioners are, without a doubt, one of the population sectors most affected by the chronic variations – generally upwards – that inflation causes the cost of living; for that reason the annual revaluation of pensions based on the real CPI “is presented as the mechanism that must serve to preserve the purchasing power of pensions,” agreed all the political parties, from the PP to Podemos, with the exception of Vox. “The Commission notes that the current pension revaluation mechanism does not enjoys sufficient political and social consensus,” they stressed in their latest recommendations in 2020. They referred to the Pension Revaluation Index (IRP), a mechanism that was calculated based on different parameters and that, in general terms, established a pension increase of 0.25% when the accounts were not healthy.
Replace that instrument with the CPI and abolish the Sustainability Factor -which never came into force and was going to reduce initial pensions in proportion to improvements in life expectancy- has caused the pension spending will go from 13.1% of GDP in 2022 to 16.7% in 2070 (3.6 points more), with a peak in the year 2051 in which public spending on pensions will be 17.3% (close to 1 in every 5 euros of national production).
If this scenario is compared with what was going to happen before the reform was approved, it is found that public spending was going to drop 2.1 points in the period, going from 12.3% of GDP in 2019 to 10.3 % in 2070. The difference in projection for that year shows that the combination of the repealed measures and the approval of the new ones represents a net increase in public spending of 6.4 points. It is also relevant that, before the reform, the spending peak was going to be exceeded in 2020, when it was going to amount to 14% of GDP.
Although these measures are the ones that have had the most impact, others that were designed by Escriv to guarantee more income for the system in the medium term have also influenced, such as the increase in contributionsboth self-employed and salaried, which in the future will imply more rights for workers, or the change of the computing period to calculate the pension.
Although the future may involve more spending, these measures – among which is the Intergenerational Equity Mechanism (MEI) or the so-called ‘solidarity quota’ – will allow the income of Social Security on GDP go from 12.9% of GDP in 2022 to 14% in 2070registering a growth of 1.1 points. The peak of income will be reached in 2050 – a time of maximum tension due to the retirement of the generation of the baby boom-, when the system’s collection will amount to 14% of GDP. These resources do not take into account the income that this administration may receive from the central State in the form of billion-dollar transfers, as is currently the case.
According to the Aging Report prior to this one, prepared by the European Commission in 2021, an increase in Social Security income was not planned in the future, which was going to remain fixed at around 11.8% of GDP.
Escriv’s reform, therefore, will result in an increase in income but it will not be enough to offset the explosion in spending. For this reason, the deficit of the system – again without taking into account potential transfers – go from 0.2% of GDP in 2022 (about 2,700 million euros at that time) to a 2.7% budget gap in 2050 to continue at that level in 2070 (the equivalent of about 39.5 billion euros today). This means that the deficit will worsen by 2.6 points in the period and reach its maximum in 2053when the phase difference is 3.1% of GDP.
The planned path is very different from that predicted before the reform, when the public deficit I was going to improve 2 points in this same horizon, going from 0.5% in 2019 to 1.2% in 2050 (its worst moment), but improving later so that in 2070 the system will have a surplus of 1.5% of GDP.
“In summary, the measures adopted in 2021 and 2023 lead to an increase in public spending on pensions of 3.3 percentage points of GDP in 2050 and 5 percentage points in 2070. The main drivers of this upward pressure on public spending in pensions are the new norm CPI-based indexing and the suppression of the Sustainability Factor. The new regime of bonuses and bonuses and the corresponding increase in the effective retirement age partially offset this increase. The rest of the measures adopted slightly increase public spending on pensions,” notes the Commission.
Towards an adjustment that could begin in 2025
When designing this reform, the Executive was aware that it may not be enough to balance the accounts of the system, which is why it enabled what has been called a ‘cierre clause‘, that is, an automatic mechanism by which additional adjustments would be applied if necessary.
Specifically, the second additional provision of Royal Decree-Law 2/2023, of March 16, established that as of March 2025 and every three years since then, the Independent Authority for Fiscal Responsibility (AIReF) would make an evaluation report in which it would calculate the net impact of pension measures in points of GDP (income minus expenses) and that, to do so, it would use “the same macroeconomic and demographic assumptions of the last Aging Report published by the Commission European”.
There are three options: One, “if the average annual impact of the income measures is equal to 1.7% of the GDP, the AIReF will verify that the average gross public spending on pensions in the period 2022-2050 of the latest Aging Report does not exceed 15%”; two, “if the average annual impact of the income measures is higher than 1.7% of GDP, AIReF will verify that the average gross public spending on pensions in the period 2022-2050 of the latest Aging Report does not exceed 15% of GDP plus the difference between the estimated average annual impact of the measures and 1.7%” ; and three: “if the average annual impact of the income measures is less than 1.7% of GDP, AIReF will verify that the average gross public spending on pensions in the period 2022-2050 of the latest Aging Report does not exceed 15% of GDP minus the difference between the estimated average annual impact of the measures and 1.7%” , Be the.
Given that the Aging report predicts that “the system’s income will grow by 1.7% from 2022 to 2050 and by 1.1% until 2070” (that is, the first case), AIReF will have to verify that the average gross expenditure projected by the Commission for the period does not exceed 15%. In this case, this report published yesterday projects that “public spending on pensions as a proportion of GDP will be on average 15.6% in the period 2022-2070 and 15.1% in the period 2022-2050“, which implies that is exceeded by a tenth the level required in the standard.
“In the event that some excess In any of these three situations, within a period of one month from receipt of the AIReF Evaluation Report, the Government will request an Impact Report of the Measures from AIReF. In its request, the Government identifies a broad set of possible measures to eliminate the excess net spending on pensions estimated by AIReF”, states the reform. That is, the Government will have to undertake an additional adjustment to balance the accounts.
To know how much this adjustment will be, you can refer to the latest Opinion on the sustainability of the system published by AIReF a year ago in which, assuming an average pension expense over GDP of 15.1% – just as the European Commission – already warned that the pension spending rule would not be met and that the deviation equivalent evening al 0,8% del PIBwhich in today’s euros is equivalent to 11,695 million euros.
Sources from the Ministry of Social Security, However, they point out to EL MUNDO that the Aging Report only represents “the first part of the photo”, but it would be necessary to know what AIReF’s calculation is about the evolution of income. If these grow above 1.7 points, then there would be more room for spending to increase and no additional adjustments would be necessary, so we will have to wait until 2025 and for that report to have “the complete picture” and be able to estimate whether or not an extra adjustment is needed and of what magnitude.