The pension reform undertaken by the Government in 2021 and which has culminated in recent days “worsens the sustainability of the system” since the new measures adopted to increase income (contributions and solidarity surcharge) do not compensate for the higher spending derived from other of them (such as the revaluation of pensions with the CPI) and fall short of approximately one point of GDP on the horizon of 2050 (some 13,300 million today per year).
This was explained this Friday by the president of the Independent Authority for Fiscal Responsibility (Airef), Christina Herreroduring the presentation of his report ‘Opinion on the long-term sustainability of public administrations’, the first to analyze the incidence of demographics in public finances and which includes calculations on the impact of the reform of the public pension system that the Government has completed this month of March.
According to the calculations made by Airef, the higher spending measures introduced by the reform -including the revaluation of pensions with the CPI and the removal of sustainability factor introduced by the PP government of Mariano Rajoy – will contribute to raising its weight in GDP by 2.4 points on the horizon of 2050, reaching 16.2% in 2050 (14.8% if these are not taken into account). account the pensions of the passive classes or the non-contributory benefits).
On the other hand, the Fiscal Authority estimates that the revenue impact in 2050 of the Intergenerational Equity Mechanism (0.4 points of GDP), the reform of the contributions of self-employed workers (0.5% of GDP), the evolution of the maximum contribution bases (0.4 points) and the solidarity rate (0.1 points) will add 1.3 points of GDP to income. The difference between the impact of the expenditure measures and that of the income measures shows a lag of 1.1 points, which would translate into a biggest deficit of the pension system. “I don’t know if this worsens sustainability, what is clear is that it does not improve it,” Cristina Herrero later qualified.
According to these calculations, the first need to review the reform could already arrive in 2025 with the need for an adjustment that, according to the baseline scenario managed by Airef, could be around 0.8% of GDP (equivalent to to about 10,600 million today), in the form of some cut in the amount of pensions or new forms of income.
The first adjustments could arrive in 2025
The opinion that Airef has on the sustainability of the pension reform is not trivial. The royal decree-law approved by the Government and which will be submitted for validation in the Congress of Deputies next week grants Airef a fundamental role as judge of the sustainability of the pension system: in 2025, and from then on, every three years, it must rule on the evolution of income and expenses based on the parameters established by the decree and, from there, the need for additional adjustments can be automatically activated.
For now, Airef’s preliminary estimates point in the direction that in 2025, when the first evaluation of the reform accounts is carried out, the need for an annual adjustment of the pension system equivalent to 0.8% of GDP (some 10,600 million today) that the Government should have to undertake on the side of expenses or income, according to the projection made by the Fiscal Authority based on its own baseline scenario.
In any case, this evaluation must be carried out on the basis of the next report ‘Aging Report’ that the European Commission must publish in 2024 (the previous one dates from 2021), with projections on the effect of the aging of the population on the spending of each of the countries in the long term.
The fiscal rules will impose an annual adjustment of between 4,400 and 5,700 million
For the moment, what Airef has done is publish this Friday its ambitious report ‘Opinion on the sustainability of public administrations in the long term’ in which it formulates the effect that demographics will have on the Spanish public debt until 2070, taking into account factors such as aging, the birth rate or immigration, among other factors. In addition, the Airef projection is made on the assumptions of GDP growth of around 1.3% on average from 2020 to 2070.
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Thus, in a baseline scenario, the Fiscal Authority concludes that, in the absence of measures, the level of debt would go from 118% of GDP marked in 2021 to 147% of GDP in 2050, until reaching 186% of GDP in 2070.
Based on this initial projection, and taking into account the criteria of the new fiscal rules that the European Commission has already published for its implementation as of 2025, Airef concludes that Spain should undertake annual adjustments between 0.43% and 0. .33% of GDP each year to meet the new public debt sustainability criteria, depending on whether the plans are articulated in four or seven years. Translated into 2023 euros, this conclusion would point to the need for annual adjustments in the public accounts of between 5,700 and 4,400 million each year (either on the income or expenditure side).