Experts Rafael Domenech and José Antonio Herce believe that the revaluation of benefits according to the CPI will mean “an unbearable cost” for the system
Spending on pensions rose almost 5% last May to reach a record figure of 10,810 million euros. Although the Minister of Social Security, José Luis Escrivá, believes that the system will find a balance in the short term thanks to an increase in income, some experts are not so optimistic.
The revaluation of pensions linked to a CPI that is absolutely skyrocketing – it is expected that this year’s average will be at least 6.5% – will mean “an unbearable cost” that will raise the system’s deficit to 6% of the Product Gross Domestic (GDP).
It is part of the diagnosis made by Rafael Domenech, head of economic analysis at BBVA Research, and José Antonio Herce, president of the Forum of Experts of the BBVA Pensions Institute. Both economists spoke about pensions and long-term savings at a forum recently organized in Bilbao by Deusto Business Alumni. Domenech maintains that the pension reform launched by the current government makes the current system “more generous”. But when it comes to sustainability in the medium and long term, “it has gotten worse.”
The BBVA expert indicated that, if one takes into account that in 2022 40,000 million euros were transferred to the Social Security fund, and that 20 million affiliates have just been reached, the deficit of the contributory pension system is about 27,000 million euros. A figure equivalent to 2.2% of GDP and that could increase to 2.5% in 2025.
The pension reform is a process still underway, but some of the measures agreed upon in the Toledo Pact are already in force. For example, the new benefits revaluation system, linked to the average CPI for one year. Domenech believes that the repeal of the previous mechanism will add 2.7% of GDP to the Social Security deficit over the next two decades, for which it would reach 5%.
In addition, he maintains that another of the novelties of the system, the Intergenerational Equity Mechanism that repeals the previous sustainability factor – the latter bequeathed pensions to life expectancy – will deepen that deficit to 6%.
Each point of inflation, 1,600 million euros
For his part, Herce warned about the consequences of linking the rise in pensions to the CPI. Each point of inflation, he recalled, represents an extra expense of the pension system of 1,600 million euros (Airef places it at 1,500 million). In this way, if this year’s CPI reached that forecast 6.5%, the disbursement in benefits would increase by 10,000 million more. Something “unbearable for the system”. Both Herce and Domenech do not flatly reject this link between pensions and price behaviour, but they do believe it to be unfeasible in a system, such as the Spanish one, which has significant imbalances.
This decompensation is explained by the high amount of pensions, especially that of retirees (the ones that involve the most spending). And that last May the average benefit that retired workers initially receive stood at 1,502.9 euros, compared to 1,629 euros on January 1. Even so, total spending on pensions reached a record 10,810 million euros in May, of which 7,820 correspond to retirement benefits.
Domenech believes that the extension of the period over which pensions are calculated -from 25 to 35 years- will help improve the sustainability of the system by 9 tenths. However, if only the 25 best years of the working career are chosen, it will worsen seven tenths.