Upcoming debate on pensions

Proposed reforms aimed at rendering the system sustainable call for negotiation and consensus

The viability of Spain’s public pension system is now in question, due mainly to the severity of the crisis. Demographic evolution is another long-term structural factor that, although to a lesser extent, casts doubt on the sustainability of the system. Some sort of reform of the way pensions work, balancing outlays with income, is clearly a necessary condition for their continued existence in the long term. The report commissioned by the government from a group of experts, before beginning negotiations with unions and employers, defines the conditions for the revision of the amounts that will be received by Spain’s pensioners. The reform must be ready by the end of September — a deadline set by Brussels, which is impatient over delays.

The most concrete conclusion has been that, as soon as the reform comes into effect, Spanish pensions will cease to be automatically jacked up in line with inflation, as has been the case since the early 1990s. The mechanism that routinely increased pensions according to the consumer price index (CPI) will now disappear. In its place the experts propose a form of automatic annual updating, in which the central consideration will be the financial situation of the system as a whole. There will be limits to pension reductions defined in terms of their “sufficiency” and, when the system’s financial situation improves, a ceiling on increases constituted by the CPI itself. That is, in the best of cases — not necessarily the most likely — pensions will be compensated for the erosion of their purchasing power due to inflation as measured by this index.

In calculating the pensions to be received, a “sustainability factor” will be applied, designed around a first-draft formula that aims to adjust pensions according to the evolution of income and outlay in the Social Security system. Were it employed at the present time, pensions would drop in real terms.

The second mechanism of calculation will apply to payments to those who retire after the reform comes into effect, in function of the life expectancy of these new pensioners. The final result cannot be other than a reduction of the outlay involved, affecting not only future pensioners but also existing ones.

The reforms and adjustments now being imposed by the crisis fall largely upon those with the least ability to defend themselves, and in adverse circumstances: these are the people who possess the smallest margin for maneuver to complement a pension’s insufficiency with savings of their own. But it is no less true that some solution to the financial imbalances of the Social Security system is a basic priority, quite independent of the demands being voiced by EU institutions.

The proposals formulated by this group of experts (though little attention has been given to the matter of clear, simple explanations) have to be taken into account. It is to be hoped that the upcoming negotiations will see some improved communication of the essential aim — to correct the financial imbalance — and some softening of the impact on those on lower pensions.