Escriv's pension reform condemns Spain to being the nation with probably the most spending within the EU: 16.7% of GDP in 2070 | EUROtoday

The former minister's pension reform Jose Luis Escriv condemn Espaa to be within the subsequent a long time the nation of the European Union that has to allocate a better a part of its Gross Domestic Product (GDP) to the fee of the pensions public, and 16.7% within the yr 2070, in keeping with the Aging Report printed this Friday by the European Commission. Before this rule was accepted, Brussels calculated that that yr there could be 16 international locations with extra spending on pensions than Spain, for which it predicted a ratio of 10.3%.

This anticipated enhance in public spending is principally as a result of accepted measures and, particularly, the annual revaluation of all public pensions in accordance with the inflacin -which has compelled pensions to rise by 8.5% in 2023 and three.8% in 2024-. These will increase are consolidated and generate a snowball impact in Social Security accounts. Although it was Escriv who put this shielding of pensions into legislation in order that they’d not lose buying energy sooner or later, he did it for mandate of the Parliamentary Committee of Pact of Toledo, during which all events agreed to entrust the Government of the day to take action.

“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 introduced because the mechanism that should serve to protect the buying energy of pensions,” agreed all the political parties, from the PP to Podemos, with the exception of Vox. “The Commission notes that the present pension revaluation mechanism doesn’t enjoys adequate 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 abstract, the measures adopted in 2021 and 2023 result in a rise in public spending on pensions of three.3 proportion factors of GDP in 2050 and 5 proportion factors in 2070. The important drivers of this upward strain on public spending in pensions are the brand new norm CPI-based indexing and the suppression of the Sustainability Factor. The new regime of bonuses and bonuses and the corresponding enhance within the efficient retirement age partially offset this enhance. The remainder of the measures adopted barely enhance 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 identical macroeconomic and demographic assumptions of the final Aging Report printed by the Commission European”.

There are three choices: One, “if the typical annual influence of the revenue measures is equal to 1.7% of the GDP, the AIReF will confirm that the typical gross public spending on pensions within the interval 2022-2050 of the most recent Aging Report doesn’t exceed 15%”; two, “if the typical annual influence of the revenue measures is increased than 1.7% of GDP, AIReF will confirm that the typical gross public spending on pensions within the interval 2022-2050 of the most recent Aging Report doesn’t exceed 15% of GDP plus the distinction between the estimated common annual influence of the measures and 1.7%” ; and three: “if the typical annual influence of the revenue measures is lower than 1.7% of GDP, AIReF will confirm that the typical gross public spending on pensions within the interval 2022-2050 of the most recent Aging Report doesn’t exceed 15% of GDP minus the distinction between the estimated common annual influence of the measures and 1.7%” , Be the.

Given that the Aging report predicts that “the system's revenue will develop by 1.7% from 2022 to 2050 and by 1.1% till 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 likely be on common 15.6% within the interval 2022-2070 and 15.1% within the interval 2022-2050“, which implies that is exceeded by a tenth the level required in the standard.

“In the occasion that some extra In any of those three conditions, inside a interval of 1 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 potential measures to get rid of the surplus web 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 primary a part of the photograph”, 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 whole image” and have the ability to estimate whether or not or not an additional adjustment is required and of what magnitude.