HEALTHPLAN MAGAZINE

Spain is set to witness an approximate 4% increase in pensions for the upcoming year, according to information disclosed by the Spanish government in its report, 'Projections of Public Spending on Pensions in Spain.' This increment marks the final step in a pension system reform initiated in 2021, ensuring Spain's eligibility for further European funds.

Though the precise figure remains contingent on forthcoming inflation data for October and November, the Ministry of Social Security is optimistic that the rise will fall within a range of 3.5% to 4.5%. Notably, the average inflation rate over the past nine months has stood at 3.88%. Officials within the department led by José Luis Escrivá emphasised that significant variations in the final percentage are unlikely. They ruled out extreme scenarios, stating that the adjustment will neither be as low as 2% nor as high as 5%. Yet, they acknowledged the inherent unpredictability of the situation in the weeks to come.

It has been firmly affirmed that this historic increase, the second-largest in the past fifteen years, following the remarkable 8.5% increment this year, will be reflected in pension payouts as of January. Even in the absence of a sitting government or a general budget, pensioners can anticipate these adjustments. Additionally, it was confirmed that minimum and non-contributory pensions will experience a more substantial increase, surpassing the anticipated 4% increment that is expected to align with the average inflation rate for 2023.

Despite the additional strain that this pension revaluation will place on a system that has faced significant challenges for over a decade, the government has ruled out the activation of the corrective mechanism introduced in the last pension reform. This mechanism entails implementing cuts or alternative revenue measures, such as raising social security contributions, should pension spending exceed anticipated levels.

According to the report, pending approval by Brussels, the corrective mechanism will not be activated since Social Security expenditures on contributory pensions are not projected to surpass 15% of the GDP. The government's forecast indicates that net pension spending will average 14.2% of GDP between 2022 and 2050, but this figure decreases to an average of 12.4% when factoring in the revenue generated by reform measures such as the increase in maximum contributions, the new solidarity tax, the intergenerational equity mechanism (MEI), and incentives to delay retirement or penalties for early retirement. This suggests that these measures will lead to an average annual increase of 1.8% of GDP into the pension system over the coming decades.

The corrective mechanism in the reform would only trigger if the difference between pension expenditures and expected revenues with the new measures exceeded 13.3%. The government's projections indicate that this threshold will not be breached. However, the Independent Fiscal Authority (Airef) holds a different view, suggesting that additional measures will be necessary as it foresees expenditures exceeding 16% of GDP.

To realise José Luis Escrivá's projections, the macroeconomic scenario he envisions must come to fruition. The minister anticipates a 2.5% economic growth rate in the next decade, heightened productivity, annual immigration of approximately 300,000 individuals, and a robust labour market with close to 80% employment for those in their forties, coupled with a 5.5% unemployment rate for those in their fifties, mirroring rates in advanced countries like Germany. Furthermore, the minister is banking on the effectiveness of his measures to raise the effective retirement age, thereby doubling the number of workers over the age of 65. In this scenario, the average retirement age is projected to increase by 1.6 years by 2050, as per the report.

Source: Sur In English