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Escrivá Plans To Compensate For The Rise In Pensions

The Minister of Social Security, José Luis Escrivá, has already defined the formula to revalue pensions without the retirees losing purchasing power. After several proposals to the social agents, Escrivá presented its last offer on Monday: the increases will be with the average inflation of the previous year.

But there will be a mechanism to absorb the hikes when the CPI is negative, as it happened in 2020, and thus prevent pensioners from gaining even more purchasing power. In these cases, the benefits will not increase that year, but the gain obtained by negative inflation will be offset in the following three years, according to sources in the negotiation.

This is one of the legs of the first phase of the reform that Escrivá wants to have ready before April to satisfy Brussels.

In 2020 prices fell 0.2% on average. In contrast, pensions, following initial inflation forecasts, had risen 0.9% at the beginning of the year. That translated into a gain in purchasing power that has since been consolidated.

To avoid this —and the increased spending that it entails—, Social Security has prepared a new annual revaluation mechanism that has detailed the unions and employers in the negotiations they have open on the pension reform .

The text that he gave you last Monday begins precisely at this point, the “new revaluation formula for maintaining purchasing power.” To ensure this objective, it proposes an annual revaluation that, unlike now, will take the average inflation between December of the previous year and November of the following year.

That is, the Consumer Price Index already registered will be used and not a forecast that is then compensated as is done now. Furthermore, when the average CPI is negative, pensions will not rise and the difference will be absorbed in the following three years in which pensions have to be raised. This proposal modifies the initial one, which was to take a moving average of the CPI for five years.

In the absence of what happens during the negotiation with the social agents, this future absorption mechanism will only be activated, logically, when prices fall.

This is the first point of the first phase of pension reform that Escrivá raises and that he wants to have ready quickly. Several sources familiar with the negotiations with the social agents even speak of a couple of weeks, although some are skeptical. Unions and employers are not at all convinced by the Social Security proposals.

“It is only a government proposal that is not shared by the social agents at the table. There must be substantial changes both in content and in terms ”, they pointed out this Friday in one of the organizations participating in the negotiations.

In these contents is the package of measures to lengthen the real retirement age and thus approach the legal one, which this year is between 65 and 66 years (and will reach a range between 65 and 67 in 2027).

The first of these would be the veto of the so-called forced retirement agreed in the collective agreements. However, this point is pending the counterproposal made jointly by the unions and the employers at the negotiating table.

Early retirement
The document delivered on Monday also specifies the restrictions on voluntary early retirement, which can be accessed two years before reaching the corresponding legal retirement age. The Social Security approach is that the reduction coefficients that are applied are calculated by months in advance of the legal retirement age and not by quarters, as now. To do so, Escrivá proposes a transitional period of three years. The end result is that there will be lower pensions for those who take advantage of this modality and, therefore, less attractiveness to do so.

Also in the partial retirement there is a substantial change, since it is proposed that the retiree cannot concentrate in one year all the work time that corresponds to him before the definitive retirement. You should work that time during each of the years.

This hinders one of the tricks that companies use to renew templates at a lower cost, but it also hinders the use of the contract of the substitute worker for the retiree.

The next touch-up on the table is incentives for delayed retirement through various avenues. One is the improvement in the award received by those who decide to continue in the labor market after reaching the legal age, since the pension would increase for everyone by 4%.

This incentive is now between 2% and 4% depending on the years of contributions. Another proposal is to give a lump sum for each additional full year of contribution.

In addition to these changes, the path for the State to pay with taxes for expenses that are considered inappropriate for the system is also broken down, following the terminology used by the Toledo Pact in its recommendations of November last year. That path will conclude in 2023, as Minister Escrivá has already announced on occasion.

Once this first phase of the reform is carried out, the intention of Social Security is to address in a second round the repeal of the current sustainability factor (whose application is suspended and links the initial pension to life expectancy) and its replacement by other; the rise in the maximum prices; the extension of the computation period to 35 years; the access of common-law couples to the widow’s pension, and the promotion of complementary pension systems. However, these are the Government’s intentions, but they do not coincide with the claims of the social agents.

Employers and unions are not convinced by the content of the Social Security proposals. The former argue that the whole package for people to retire later will end up making it difficult and expensive to renew the workforce.

The latter do not like “the perimeter” of topics that are proposed. They also believe that it is time to address the contribution of the self-employed according to the income they receive. And they maintain that the intention of Social Security to close this negotiation phase as soon as possible is practically impossible.

Brussels zealously watches
The negotiation to reform pensions goes in parallel with the talks with Brussels to receive European funds. These have been linked to the approval of reforms. And Brussels will examine every six months, before each disbursement, that milestone by milestone is met with the planned roadmap.

The fact that the 35-year increase in the calculation period has been brought to October, one of the points that entails the most savings and the most controversial, implies that it will be a milestone to take into account to release these funds at the end of the year.

The whole of this reform plan is still being negotiated with the European Commission. And at this point there are somewhat differing versions depending on who is consulted in the Executive: for some, the pension reform is almost on track and, although they recognize that Brussels continues to ask for numbers, they consider that Spain is doing more than the rest, it has a better starting situation in pension spending and, therefore, the above would suffice.

For the other part, Brussels believes that the reform is insufficient and calls for greater ambition. Especially when at the beginning of the negotiation the Commission tried to impose a fiscal adjustment in exchange for the funds. But this requirement was circumvented thanks to the clause that lifts fiscal discipline due to the pandemic.

This would explain why the focus is on pensions, whose deficit represents a good portion of the hole in the State’s accounts and that, in addition, a part now intends to go to the budget without tax measures to compensate it.

The deficit of public administrations was already around 3% of GDP in 2019, a figure for which Europe initiates the procedure to put a country under fiscal surveillance. Now the structural deficit could be at 5%, according to the Bank of Spain. And in 7% according to the Commission. Hence the importance of pension reform.

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