The pension reform that the Government of Spain has just completed, led by Minister José Luis Escrivá, is insufficient to ensure the sustainability of the system and threatens to trigger public spending. Who says so is the Independent Authority for Fiscal Responsibility (Airef), the body that monitors the policies of the Executive and which was chaired at its foundation by the current head of Inclusion, Social Security and Migrations. Airef, in essence, ensures that the additional expenses that the system will incur will practically double the expected increase in revenue. For this reason, the changes promoted by the Executive in 2021 and 2023, when the first and second parts of the reform were approved, will raise the public deficit by 1.1 points of GDP in 2050 and by another point around 2070, triggering the debt up to 186% of GDP.
The data is collected in the last report of the public auditor, presented this Friday. The pension reform, on the one hand, will make it possible to raise public revenue by 1.3 points of GDP thanks to measures such as the increase in additional social contributions of the maximum tranches. However, the increase will not be enough to cover an expense that will rise by 2.4 points due to measures such as the automatic revaluation with the CPI.
In the base scenario proposed by the organization chaired by Cristina Herrero, the population in Spain will reach 50.3 million inhabitants in 2050 and 52.1 million in 2070, a demographic increase that is mainly due to the dynamism of migration. Despite this, in parallel there will be a Profound transformation of the structure by age due to population aging and the drop in the birth rate, something that would bring the dependency rate to 51.4% and 45.9% in 2050 and 2070, respectively, compared to the current 26.6% . In the same scenario, revenues would increase their weight over GDP in the absence of economic cycles in the projection to reach 44.7% in 2050 and 45.6% in 2070, from 43.5% in 2021. But the Expenditures would also grow to reach a maximum of 53% of GDP in 2058 to later stabilize at 52.6% in 2070.
In this context, and without economic policy measures or fiscal rules, aging could bring public debt to 186% of GDP in 2070 and the deficit to 7% of GDP that same year. Expenditure on pensions would begin to accelerate especially from 2035, reaching a maximum in 2049 of 14.8% of GDP for Social Security system pensions and 16.3% including non-contributory and passive class pensions. Subsequently, once the pressures of aging abate, spending would fall to 13.4% and 13.9% respectively in 2070.
For this reason, the tax authority considers it necessary to “open a process of reflection, both in society as a whole and internally in each administration”, on how to face the challenges of the sustainability of public administrations. The celebration throughout this year of different electoral processes “should not be an obstacle in this process, quite the contrary”, affirms the organization, which proposes to articulate a national fiscal strategy in the medium and long term with the participation of all the levels of administration and that contemplates a comprehensive reform of the national fiscal framework to guarantee the sustainability of the system.
Airef considers that the pressure that aging will exert on public accounts and, in particular, on spending on pensions and health spending should lead to further analysis and evaluation, as well as the effect of the reforms that are implemented. In the case of pensions, the reforms and the evolution of the system should be studied both from the perspective of their impact on future spending and sustainability, as well as from the sufficiency, contributory and intergenerational equity.
It should be remembered that the pension reform, agreed between the Government and the unions and rejected by the employers, is one of the crucial milestones that will allow the next tranche of aid from European recovery funds. The planned disbursement, the fourth that will come from Brussels, is around 10,000 million euros and is subject to the fulfillment of 58 milestones, including four directly linked to the pension reform.
After knowing the public auditor’s report, Minister Escrivá explained that “what is important” are the recommendations that Airef makes to the Government, some suggestions that the head of Social Security has described as “absolutely reasonable and sensible”. The minister, in fact, has not interpreted the document as criticism, but as something “positive”, he explained in statements collected by Europa Press.
He has also highlighted that some of the scenarios that Airef includes in its analysis, and that allow projecting the levels of national wealth and employment in the future, are going to remain “outdated” due to the effects of the labor reform and the increase in the productivity. Other of the states contemplated by the tax authority, the minister has defended, do coincide with those provided by the Government.
Indeed, Airef explains in its report, this hypothetical scenario does not take into account other phenomena beyond the demographic, such as climate change, technological advances or the application of fiscal rules. These are factors, she adds, that “will certainly affect growth and the accounts in that time horizon.” For this reason, the body led by Cristina Herrero also proposes three other alternative states.
In the first, an average annual economic growth of three tenths higher than the baseline scenario is proposed. In this case, pension spending would fall to 13.5% of GDP in 2050, 1.3 points lower than the baseline scenario. More generally, the public deficit would moderate, reaching a maximum of 5.4% in 2053. In the second approach, a framework of fiscal rules is put on the table that obliges EU countries to assume spending commitments, taking to allocate an adjustment of between 0.32 and 0.43 points of GDP per year for this.
In the third scenario, changes are proposed in the evolution of income and expenses. By way of illustration, a structural reduction in the deficit, via income or expenditure, of one additional point from 2027 would mean a reduction of 25 points of GDP in debt in 2050 and 47 in 2070. In the opposite direction, a structural increase in the deficit, via income or expenses, an additional point from 2027 would mean an increase of 25 points of GDP in debt in 2050 and 47 in 2070.
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