The pension reform – taken as a whole, adding what was approved in 2021 and the measures that will be validated tomorrow in Congress – is “balanced, comprehensive and ambitious”. In addition, it is what Spanish society wants and, above all, it leaves room for future governments to correct, with the tools they choose, any possible diversion of financing that may occur. This is how the General Director of Social Security Organization, José Férnandez-Albertos, defended today the changes in the pension system recently agreed between the Government and the unions, also with the approval of Brussels.
The head of Social Security on the minister’s team, José Luis Escrivá, defended this during his speech at the Foro Futuro, the economic research observatory organized by Cinco Días with the support of Grupo Santander, which today addressed this reform, in addition to Fernández Albertos, together with two of the expert economists who have criticized the changes piloted by the Executive.
These two academics who have analyzed what, in their opinion, are the shadows of this reform are Ángel de la Fuente, Executive Director of the Foundation for Applied Economics Studies (FEDEA) and Santiago Carbó, Professor of Economic Analysis at the University of Valencia and Director of Financial Studies at Funcas. Both have agreed, in general terms, that the measures to increase income approved in this reform will not be enough to offset the sharp increase in expenses that will occur in the pension system due to the massive access of those born in the baby boom to retirement and after having eliminated the sustainability factor approved in 2013.
“The reform from the budgetary point of view is complicated to understand. The numbers don’t quite add up. The suppression of the sustainability factor puts a lot of pressure on spending for the coming years. It was expected that the second phase of the reform would offset the increase of 3.5 points over GDP that will mean having eliminated this factor, but not only has this not been done, but the measure that could moderate the growth of spending, which was the extension of the computation period to calculate the pension has turned around and increases the costs”, explained the person in charge of Fedea. What’s more, “this -he added- threatens to eat up the fiscal space. We will not have much money left to do other things, including healthcare and dependency, which future pensioners will also need to a greater extent.
For his part, Carbó has added another reproach to the authors of this reform: the lack of information for the public. “There is a lack of information, because the Spanish continue to think that pensions are low and that they can still go up. And that happens because it is not reporting on the ballasts of the labor market or on low wages. Society is made up of adults, who can be told that demography is not in our favor, that in the next 30 years the system is going to be under a lot of pressure and that the increase in income is not enough to the increase in spending.
Thus, the person in charge of Funcas has thanked the Government for the effort it has made by introducing an automatic imbalance adjustment mechanism, but precisely for this reason “there is once again a signal that sustainability is not guaranteed.”
In this scenario, De la Fuente and Carbó have criticized that this second part of the reform deals exclusively with income and has not exercised any control over the increase in spending. “The weight of public spending is too oriented to certain generations at this time. This has been entrenched for ten fifteen years and no steps have been taken for an in-depth reform that also monitors spending. This can only be done with an in-depth reform where citizens are told: this you have contributed and this you can take with you, and that is how the system works”, insisted Carbó, who, once again, appreciating the effort of the Ministry of Escrivá , has considered that “changes will have to be addressed in a few years”.
However, Fernández-Álbertos has responded to all these criticisms by recalling that this second phase of the pension reform has focused on increasing income because in the first phase approved in 2021, incentives to prolong working life were already included ( aimed at cutting spending and raising income because contributions are made for more time and pensions are collected in fewer years), “which were ambitious and are already unfolding their effects”. What’s more, the person in charge of Social Security has insisted that these measures, whose forecast increase in income is between 1 and 1.6 points of GDP, “were already valued positively and as feasible by Brussels in the evaluation of the second disbursement of European reconstruction funds”.
In this way, Fernández-Albertos has explained that measures such as these incentives are those that the Government has considered to be “socially affordable”, since he has recalled that “the factors with which a Government operates – subject to the evaluation of citizens at the polls—are other than those handled by academics.” But even on this point, the Social Security leader has called on critics of the reform “to say what their alternatives are: not to revalue pensions or, at least, not all of them; cut new entry pensions…”. For this reason, he has claimed that, “in the political debate we would like to have this debate. Because the measures adopted These measures are also the most reasonable and not only the ones that society can best buy, but the one with a more balanced distribution of burdens”.
However, De la Fuente has not thought the same. As indicated, most of the income improvement “is charged on a very narrow base (the maximum bases that increase by 38% and the solidarity fee that is applied to the salary that exceeds said maximum base), those of the highest salaries. “This turns the contributions, which are deferred salary, into a pure and hard tax (…) and whose income does not even come close to what is necessary.” Given this, as an alternative, Fedea has proposed on several occasions that “the charge be made on a much broader basis through a surcharge on the state income tax fee, because with this it would be paid among all and the voter would make the gap visible. that there is between income and expenses, but as things are being done, the average citizen is not aware that there is a problem and there is more pressure to continue making reforms”, added this expert.
Carbó, for his part, agreed that financing future charges fundamentally only with contributions “is very distorting” so the idea of expanding the sources of financing (IRPF as proposed by Fedea, for example) should be considered. “It would not change so much, the distribution would be less noticeable and everyone would be aware of the situation,” said the person in charge of Funcas.
But this point also had a response from the representative of the Executive. In fact, Fernández-Albertos recalled that the Government has already withdrawn part of the financing of pensions from the contribution system, having transferred more than 20,000 million of the so-called improper expenses, to finance them with taxes. What’s more, he reached out to those who advocate expanding funding sources, ensuring that “in this sense, there is space and we should agree on how these funding sources should be to respond to an older society.”
Work market
Although, these three pension experts agreed on something: the importance of improving the labor market –mainly wages and productivity– to help improve the financing of the system. However, they introduced qualifications, since for Santiago Carbó, for example, “if all pensions are revalued with the CPI, it would also be fair to correct the problem of low wages in Spain. Dysfunctionalities in the labor market must be fixed because they have an impact on the financing of pensions”.
While José Fernández-Albertos said: “I can only disagree with the fatalistic vision of recent years about the irreversible damage of temporary employment”, because according to what he assured, said damage has been reversed “in a few months” with the labor reform. “When we talk about how to deal with the pressure of spending, labor measures are just as important, if not more, and here there are signs for optimism rather than pessimism,” he concluded.
Notional accounts or resort to debt
Criticism of the government’s pension reform resulted yesterday in the debate held in the Future Forum on this matter, in possible alternatives to the changes in the system that the Congress of Deputies intends to validate today.
It was precisely the general director of Social Security Regulation, José Fernández-Albertos, who launched a question that was dedicated, above all, to the opposition of the PP that intends to reject the pension reform. He urged these critics to say what their alternatives would be to reform the system. At this point, the director of CincoDías, Amanda Mars, who moderated this debate, asked the same question to the two expert economists who participated in the forum. And the executive director of the Foundation for Applied Economics Studies (Fedea), Ángel de la Fuente, immediately picked up that gauntlet and outlined the reform that he believes is most appropriate for the Spanish pension system. “There is no single magic answer but in the long term we should think about a transition to a notional account system like the Swedish one. And during the transition it will be necessary to continue scratching where possible: the retirement age will have to continue to be raised; raise prices somewhat; put extra money and look for formulas to reduce the ratio between the pension and the last salary, one way is to take into account the entire working life; and perhaps adopt other changes in the determination of the pension”, explained De la Fuente.
Along the same lines, the professor of Economic Analysis at the University of Valencia and director of financial studies at Funcas, Santiago Carbó, also considered that the possible transition to a system of notional accounts like the Swedish one “is very interesting and is not usually put on the table; but with this the pension that the workers will take would be much more linked to what they would have contributed”.
Although, during this discussion the possibility also arose that since it is a two-decades-old financing problem marked by demographics, why not finance it with debt?
For Carbó, if that were the response to the increase in spending, “it should be accommodated so that this debt is repaid in less than 30 years and it is not a permanent expense.” Moreover, he warned that in recent years it has been possible to finance public deficits very comfortably “but this is not always the case and I am no longer referring to a debt crisis but only to a more significant increase in financial costs”. Thus, he added that “as a solution it is already being done in part – as De la Fuente also specified – but beware, it has its risks in an environment of greater scrutiny in the markets.”