Government to withdraw €6.148bn from state pension fund’s piggy bank this year

Social Security system to accumulate deficit of 36.5 billion through to 2016 due to increase in number of retirees and drop in the number of contributors

Labor Minister Fátima Báñez arrives at Congress on October 1.
Labor Minister Fátima Báñez arrives at Congress on October 1.Ballesteros (EFE)

Labor Minister Fátima Báñez on Tuesday announced that over the next three months the government will withdraw 6.148 billion euros from the reserve fund of the state pension system to cover benefits due to retirees.

In July of last year, the Labor Ministry availed itself of 4.5 billion euros from the fund to cover the extra payment due to pensioners in the summer.

Since it took power at the end of 2011, the conservative Popular Party government has drawn on public reserves of 23.361 billion euros to meet funding requirements, including 18.651 billion from the pension reserve fund itself and a further 4.980 billion from another public fund.

Including the sum to be withdrawn announced by Báñez on Tuesday, over the period 2012-2013, the reserve fund of the pension system will fall to 59.350 billion euros from 66.900 billion at the end of 2011. The fund continues to generate interest income, which explains why it has not been depleted by the full 18.651 billion euros that has been withdrawn in the period 2012-2013.

Báñez was addressing the congressional Pact of Toledo Commission, a cross-party body that also includes representatives from the country’s labor unions. The minister was explaining the reform of the pension system approved by the Cabinet last Friday, which set a floor on the annual hike in pensions of 0.25 percent and a ceiling of 0.25 percent plus inflation. Retirees will receive the minimum increase next year.

Currently, annual pension revaluations have been indexed to the rate of inflation, with the government obliged to compensate seniors for a loss of purchasing power if the actual inflation rate exceeds the government’s official target. However, the administration declined to do so in 2012, arguing that cutting the public deficit had to take priority.

Government sees savings of 33 billion euros from state pension reform in the period 2014-2024

In response to demands from the OECD and the IMF, the Cabinet on Friday also approved a draft bill decoupling public prices and outlays (including pensions) from inflation, a process known as deindexation.

The reform also takes into account the pension system’s revenues and outlays to determine the size of the hike. It also introduces other demographic factors, such as life expectancy, to ensure the sustainability of the system.

The government estimates that the new system will generate savings on spending on pensions of 32.939 billion euros in the period 2014-2024. If an inflation rate of 2 percent prevails over that period, the accumulated loss on the average state pension would be 1,526 euros a year, or 109 euros a month.

The Socialist government of Prime Minister José Luis Rodríguez Zapatero also introduced reforms to the pension system in 2011 under which the official retirement age is being gradually increased to 67 years. The formula used to calculate final benefit entitlements was also increased from the amount of Social Security contributions made by workers in the last 15 years prior to retirement to 25 years.

Báñez said the overhaul of the system was necessary to tackle the problem of a fall in the number of people paying Social Security contributions because of the economic crisis and an increase both in the number of pensioners and the benefits they receive. As a result of this, the minister said the Social Security system will generate an accumulated deficit of 36.5 billion euros through to 2016.

“This clearly illustrates the economic risks that the state pension system in Spain is facing at a time when the number of contributors to the system has declined by 3.1 million since 2007,” Báñez said. Over that period, the ranks of retirees have increased by about 500,000.

The minister said the number of retirees is increasing by 100,000 a year, while there will be nine million fewer people in work to support the system in 2050, when 30 percent of the population will be over 50.

“The system has shown itself to be viable so far, but that doesn’t guarantee that it will be in the future if we don’t take further measures,” the minister said.

Formally introducing the pension reform for its passage through Congress, Báñez argued that the reform guarantees the spending power of retires because the deindexation of prices would help prevent inflation in Spain from exceeding the euro-zone average as has been the case since the single currency was introduced.

However, opposition parties begged to differ. The last labor minister in the Zapatero government, Valeriano Gómez, said the reform the government intends to push through parliament “will not last longer than the PP remains in power” because “it proposes a model that not only asks for sacrifices in a particular year, which may be necessary, but also puts forward a formula that backs a continual loss of purchasing power.”

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