Reform to cut value of annual pension by 1,500 euros in five years

The potential loss of purchasing power retirees face as a result of the proposed amendments to the state pension system is much greater than estimated by the government.

The draft bill containing the reforms presented on Monday by the Labor Ministry comprises savings of 33 billion euros over the period 2014-2022. However, that figure is based on the assumption of an annual inflation rate of only 1 percent, a supposition clearly at odds with the trend in consumer price increases in Spain.

Using the European Central Bank’s medium-term target for inflation of 2 percent, the loss in purchasing power for retirees over the period in question would be around 70 billion euros, while the assumption of an inflation rate of 3 percent would save the state 110 billion euros.

According to the latest available figures, the average state pension in Spain is 13,747 euros a year in the form of 14 monthly payments of 981.92 euros. Assuming an annual inflation rate of 1 percent, the annual pension in 2019 would be 638 euros less as a result of the planned reforms. If an inflation rate of 2 percent prevails over that period, the accumulated loss would be 1,526 euros a year, or 109 euros a month. With inflation of 3 percent, pensioners’ purchasing power would be reduced by 2,460 euros a year.

The reforms call for pensions to be increased by a minimum of 0.25 percent a year and a maximum of inflation plus 0.25 percent, with the new system to take effect at the start of next year. The size of the increase will depend on the state of the finances of the Social Security system.

Currently, pensions are indexed to inflation and are revised upward annually to compensate retirees for any rise in inflation above the target rate set by the government.

There are also plans to introduce a new formula to ensure the sustainability of the pension system that takes into account factors such as the official retirement age, the number of years of Social Security contributions and the number of years on which pension entitlements are calculated, as well as life expectancy rates. This innovation is due to take effect in 2019.

The government’s figures point to the Social Security system registering an annual deficit at least through to 2018. This is based on a jobless rate that has been over 20 percent since 2009 and is not forecast to fall below 25 percent until 2018.

While the number of people contributing to the Social Security’s coffers is expected to be low, the number of pensioners is expected to continue to increase. As a result, the government does not expect the Social Security system to post a surplus until 2022.

The assumption of an inflation rate of 1 percent is based on the same target set by the current conservative Popular Party in the past two years. In 2012, this led to a significant loss of spending power for pensioners as the actual inflation rate was 2.9 percent. The government declined to compensate pensioners for the failure to meet the target, arguing that the priority was to reduce the public deficit. Average inflation in Spain over the past 14 years is 2.9 percent.