Government studying “formulas” to compensate pensioners for inflation spike

The secretary of state for Social Security, Tomás Burgos, said Tuesday the government is studying “formulas” to compensate state pensioners for the loss of purchasing power as result of a jump in inflation without putting further pressure on its already strained finances.

The law obliges the administration to top up pensions to offset any deviation above the official inflation target for the year, which is one percent for 2012. Inflation in September was estimated at 3.5 percent, after the standard value-added tax rate was increased to 21 percent from 18 percent in the same month. If the consumer price index remains at that level in November, this will entail a further cost to the state coffers of five billion euros between the end of this year and the start of the next.

The government included a one-percent rise in state pensions in the 2013 budget but in order to pay for this while maintaining its deficit-reduction program, it will dip into the Social Security reserve fund to the tune of some three billion euros. The government has been so far evasive about what it intends to do about the loss of spending power of the 8.9 million retirees in Spain, but one option would to follow the suit of the state budget by tapping the reserve fund.

The main opposition Socialist Party leader, Alfredo Pérez Rubalcaba, has accused the administration of Prime Minister Mariano Rajoy of deliberately ignoring the situation until after regional elections in Galicia and the Basque Country later this month.

Burgos acknowledged that compensating for higher-than-expected inflation represented an “extra burden that puts a strain on the system” and was a “source of additional concern.” However, he said “the only thing the government is ruling out is not fulfilling the law.” Experts expect the VAT hike to put some further upward pressure on inflation in the coming months, but Burgos did not rule out a shift in the price trend. “You have to be cautious since there could be modifications in the CPI,” he said. “Nobody forecast the performance of the CPI and to advance formulas on how to assume this deviation appears to me to be jumping the gun.”

During a trip to Madrid on Monday, the European Union’s commissioner for economic and monetary affairs, Olli Rehn, urged the government to continue with reforms to ensure the sustainability of the state pension system.