2023-05-03 12:02:20
Public spending on pensions will reach 17.8% of GDP in 2050, 2.5 percentage points more than the figure forecast by the Government, while the basic deficit of the system (before State transfers) would be 4.4 points of GDP on average between 2022 and 2050, standing at 6.3 points at the end of the period. This is stated by the Foundation for Applied Economics Studies (Fedea) in the third article in which it analyzes the pension reform of the Minister of Social Security, José Luis Escrivá.
The projections prepared by the economist Ángel de la Fuente indicate that excess spending on pensions will force the activation of the safeguard clause of the Intergenerational Equity Mechanism (MEI) that contemplates the reform barely two years after the reform that was supposed to guarantee sustainability was approved of the system, something that institutions such as the Bank of Spain or AIReF have already questioned.
Fedea estimates that it will be necessary toraise social contributions between 3 and 4 points in five years. “The adjustment, however, would leave the public pension system with a still very large basic deficit, 3.2% of GDP on average between 2022 and 2050 and around 5% in 2050,” the report continues.
This disbursement of 17.8% of GDP to pay pensions would exceed the EU-27 average by 5.2 points and would place Spain at the forefront of European countries in spending on pensions, so that it would be 1.6 points ahead of Italy, in second position.
The increase in spending, which would not be sufficiently compensated by incomeabsorbing 100% of the net income of the State for IRPF, 37% of its total net tax income (always excluding the participation of the Territorial Administrations) and 52% of the net tax revenue of the Stateaccording to Faith.
All because of the mismatch between Escrivá’s calculations and those of Fedea. The Government anticipates that the reform as a whole will have a “moderate” effect on the budgetary balance of the public pension system, which will remain slightly below one point of GDP “even at the worst moment of the period analysed”. Fedea, on the other hand, points to a deterioration of more than 3 points in the basic deficit of the system in the final part of the period due to its “very different” estimates regarding the budgetary effects of incentives for delayed retirement and reform of the contribution system for self-employed workers.
“These results call into question the logic of a reform that would need important fixes from the very moment of its approval, as well as the design of the correction mechanism, with an activation condition that is not very transparent and compatible with a still very high basic deficit”, indicates the latest Fedea report.
The MEI’s safeguard clause forces prices to rise to prevent the system’s deficit from skyrocketing. This clause is activated if the expected average expenditure on public pensions exceeds the sum of 15% of GDP and the excess of extra income exceeds 1.7% of GDP generated by the income measures adopted since 2020.
If this is fulfilled, the Government will be obliged to take measures to gradually correct the expected excess of spending. Thus, within a month, you must draw up a list of possible corrective measures and ask AIReF to prepare a report quantifying their impact.
Based on this report, the Government will negotiate with the social agents an adjustment plan that must be sent as a bill to Parliament for its entry into force on January 1 of the following year. If the law with corrective measures is not approved within the stipulated period, the MEI additional contribution rate would be increased immediately to offset 20% of the anticipated overspending.
Fedea estimates that the MEI safeguard clause would be activated from now on with the projections of the 2021 EU Aging Report and its estimates on the impact of the pension reform, since it calculates that, in a central scenario, the expected excess spending would be 0.93% of GDP.
To correct this deviation, it would be necessary to raise contribution rates between 3 and 4 points in five years, which would not prevent the system from still showing a basic deficit of 3% of GDP.
“In the absence of important changes, what is foreseeable is that the next edition (of the EU Aging Report) will force the activation of the corrective mechanism of the MEI, only two years after the approval of a reform supposedly designed to guarantee the sustainability of the system “, says Fedea.
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