The rise in prices will force the State to spend 4.9 billion more on pensions next year

The rise in prices will force the State to spend 4.9 billion more on pensions next year

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The rise in prices will force the State to spend 4.9 billion more on pensions next year

Demonstration of pensioners in the streets of Bilbao on June 28.Luis Tejido / EFE

That inflation is the enemy of saving is one of those maxims that cannot be debated. The latest pension reform, which linked its rise to the evolution of the Consumer Price Index (CPI), guarantees that pensioners will free themselves from the punishment of seeing their purchasing power diminish. The rise in prices in recent months will force, on the one hand, to compensate next February with the famous “paguilla”, the deviation in prices above the 0.9% that the Government initially expected. In addition, it will also be necessary to revalue the pensions for next year. This double effect will mean an extra cost of about 4,900 million euros to the public coffers in 2022, according to different analysis houses.

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“What is worrying about these latest increases is that they give rise to second-round effects due to a spiral of inflation and indexation of income (wages, benefits, pensions or any other). Eliminating these effects has taken a lot of time and effort in European economies, to avoid increases in unemployment and losses in competitiveness ”, says Rafael Doménech, head of Economic Analysis at BBVA Research. Their latest projections placed average inflation for 2021 at 2%. In June, the CPI reached 2.9%, the highest rate since 2017.

The Government initially managed inflation forecasts of 0.9% for 2021, and the rise in pensions was built on this idea. But those calculations are dead paper. The new accounts of the Executive for the end of the year speak of a minimum increase of an additional point (1.9%), while in the Foundation of Savings Banks they raise it to 2.5%. Eduardo Bandrés, director of Public Economy and Welfare at Funcas, warns of the risk to the sustainability of public finances. It also ensures that this new inflationary paradigm will generate “an important impact” on the Social Security accounts.

Despite the sudden surge in inflation, analysts agree on its transitory nature. These price increases are due to factors such as the cost of energy – with the electricity bill setting records -, raw materials – such as oil, which in June surpassed the $ 70 barrier – and the shortage of chips , which has generated supply problems in basic products such as mobile phones, computers, cars, airplanes, medical equipment or household appliances.

Each point of the CPI supposes, according to Funcas, an additional outlay of 1,400 million euros in pensions. Last year, the State allocated almost 119,000 million to this item, a third of the General State Budgets. That figure will grow this year, since between January and July Social Security has already disbursed 71,000 million in benefits, of the 163,000 that are budgeted in the 2021 accounts.

“The indexation of pensions with the CPI will increase the deficit of a system in which there is already a high deficit. This revaluation should have been carefully assessed and, in any case, it should have been compensated with other measures that would have supposed an equivalent containment of spending ”, says Doménech, who does point out,“ for equity reasons ”, minimum pensions such as that would have to be shielded.

Reforms

“I have no doubt that the model of the public pension system in Spain needs reforms, but the measures that have been adopted so far have been the easy ones,” Bandrés explains. It indicates as one of them the transfer to the State of the so-called improper expenses of Social Security, and that its minister, José Luis Escrivá, valued at 22,800 million. “That does not fix the problem of the public administrations as a whole, it only moves it from place to place”, he adds.

The first part of the pension reform agreed by the Government and the social agents before the summer was armored under the provisions of the Toledo Pact. In addition to the adjustment of the benefits to the CPI – unless this is negative, in which case they will remain unchanged -, the repeal of the sustainability factor was also agreed, which will be replaced by a negotiable generational equity mechanism until November 15, and which will operate from 2027. Defining it, all the parties involved agree, is the most complicated section within the second part of the reform.

“It will be clearly linked to the CPI,” says Bandrés, who insists that demographic transformation must be a variable to take into account. “There is a problem of financial sufficiency and it seems that it wants to be solved via transfers from the State. However, the population pyramid says that there are more and more pensioners and fewer workers, ”adds the Funcas expert. “Maintaining the purchasing power of pensions is a desirable objective as long as it is consistent with the sustainability of the system and that it has sufficient resources,” adds Doménech.

23 euros more per month for six million retirees

The impact of rising prices on the pension system will cost billions of euros in public coffers. But it will benefit almost ten million pensioners, who will not lose purchasing power. In smaller numbers: it will mean an increase of 23 euros for more than six million retirees.

As reflected by the National Institute of Statistics (INE), the average pension of a retiree in Spain in the month of July was 1,034 euros —the highest since 2016—, so once patched it will rise to 1,059.

One of the ways in which the Government intends to loosen the pension rope is by matching the real retirement age (64 years) to the legal one (66 years). For this, it has established a table of bonuses for those who delay it, and penalties for those who advance it. Although it has not estimated, for the moment, other modifications.

“It does not seem like a painful measure to me, but perhaps we should think about redefining the number of years that it is necessary to have contributed to receive a minimum pension (currently 15 years). Extending the number of years is perfectly justifiable in terms of equity and taxation. In one way or another, it will be necessary to assume that the pension and salary ratio has to decrease if we want the system to be sustainable ”, emphasizes Eduardo Bandrés, an analyst at Funcas, the study service of the old savings banks.