The EU Commission has either turned a blind eye to the futility of Spain’s proposed pension reform, or is as happy as the current government to preside over empty promises made with false calculations.
The socialist-led government, in power since 2019, has been slowly negotiating pension reform with the EU Commission. However, economists assessing Spain’s proposed changes, which have reportedly been given verbal approval by Brussels, project they will not only fail to save the strapped system, but actually increase pension costs in the long run.
In 2019, the last year before the COVID crisis, Spanish social security had a deficit of 1.3% of GDP, Voz Populi reports. Additionally, the latest Aging Report, also produced by the government, predicted that this figure would keep rising, reaching 2% in 2050 and later 5.5%.
Spain received an extension last year on enacting reforms, but the EU Commission’s approval is now critical since the transfer of Spain’s next lot of the Next Generation COVID recovery funds depends on it. It needs the EU Commission to sign off by the end of the month.
At a recent event in Madrid, the Minister of Inclusion, Social Security, and Migration, José Luis Escrivá, said he had “practically” reached an agreement with Brussels on the reform.
Currently, in Spain, the retirement age stands at 65 and a worker must contribute to the system for 25 years. The minimum pension is set at €10,103.80 and the maximum at €39,474. The calculation of the payment is based on the average salary of the worker.
Under the reforms, workers will be able to choose between the present system and an alternative calculation in which the computation is extended to 29 working years, with the 24 worst-paid months discarded from the maths. The ‘Mechanism of Intergenerational Equality,’ another social security tax, will increase from 0.6% to 1.2% at least until 2050. Maximum pay-ins to social security will also increase, at the same time that maximum pensions will be frozen. Both changes will be incremental between 2024 and 2050. An additional solidarity tax will be added, too.
But several experts agree that the reform is merely cosmetic and does not address the structural problems of paying pensions in an ageing society.
A report by economist Ángel de la Fuente at the Spanish think tank Fedea called the reform “clearly insufficient.”
The economist calculates that, even with the reform, around the year 2050 the system will need extra resources worth around 4.5 points of GDP, which will mean dedicating around 60% of personal income tax collected just to paying pensions. This will obviously reduce what can be spent on other areas, from public healthcare to education to defence.
“Such pressure will leave little room to finance increased spending on almost anything else, including health and care, with rapidly growing needs due to rapidly ageing populations,” it warns.
Additionally, since the sharp increase in social security contributions falls mostly on companies, the business sector is warning that it will slow job creation and further stagnate salaries. They have also called the planned reform a “populist” move.
Opposition leader Alberto Nuñez Feijóo said,
There is no reform, only a patch until 2025, to keep going until the end of the legislature. It is an agreement that is based on a succession of lies … If you want to have the experience of our party, we have an outstretched hand. But if Sánchez wants to impose his plan, let him. It will bear the marks of a pseudo-reform full of loopholes and postponements.
Economy ministers also met Monday, March 13th, in Brussels to discuss national budgets as the bloc transitions back to enforcing the normal debt ceiling of 3% of GDP.
General elections will be held in Spain this year, likely in December.
