Pension reform: Why does the Spanish government speak of "success" while Airef questions it?

MadridOne cold, one hot. That's the conclusion drawn from the first major examination of the pension reform that the Spanish government launched in 2020. This Monday, the Fiscal Authority (AIREF) published the results of the acid test—the agency is mandated to evaluate the measures every three years—and, while Cristina Herrero confirmed compliance with the "spending rule" of the AIREF system, in a press conference. However, the Spanish government sees AIREF's conclusions as an endorsement of all the approved changes. In fact, the Ministry of Social Security speaks of the reform's "success." Why do they have such different opinions?

Spending Rule

One of the keys to this first examination lies in the so-called "spending rule." This element was introduced into the reform following an agreement with Brussels and determines whether there is a balance between the income and expenses of the pension system in the long term. That is, whether income will be sufficient to cover future benefits, especially when the largest generation, the older generation, begins to retire. baby boom.

Airef has confirmed that, for now, the rule is being complied with. This commitment establishes that during the period 2022-2050 (years of greatest tension in the pension system due to the retirement of the generation of baby boom), average net spending on pensions cannot exceed 13.3% of gross domestic product (GDP, the indicator that measures the size of the economy). Today, the projection for this net spending stands at 13.2% of GDP, one-tenth of a percentage point lower.

Complying with the rule means that the Spanish government is not required to make any changes for at least three years, when a new test will be passed. However, if it has not complied, it would have to approve automatic adjustment measures for pensions, either on the expenditure side, the revenue side, or both. These measures would have to be approved by the Congress of Deputies within a maximum period of one year. Otherwise, workers' contributions would automatically increase to obtain more revenue. "Let's look to the future with optimism," stated Social Security Minister Elma Saiz, who has ruled out any changes. This means that, for example, no further increase in social security contributions or cuts in benefits are expected.

The Airef report states that gross pension expenditure for the 2022-2050 period stands at 14.6% of GDP (below the 15% set by the reform), while measures linked to increasing revenue have an average annual impact of 1.4%). The comparison of one element with another results in 13.2% of the previous GDP.

Discrepancy with the calculation

So far, everyone agrees. Now, the first major clash comes with how this spending rule is calculated. While the Airef calls the calculation "weak" and "limited," particularly the expenditure rule, sources from the Ministry of Social Security point out that it is in the law: not only was it approved by the Congress of Deputies, but it was also endorsed by Brussels.

Regarding pension spending, the Airef should look at the European Commission's latest Ageing Report. This document includes the evolution of pension spending in Spain based on demographic trends. In the organization's view, this variable is "very sensitive" to changes. It also criticizes its stricture due to the fact that other elements specific to the Spanish economy are not incorporated, such as the evolution of the public administration deficit, or debates such as intergenerational equity. However, the most important amendment is the inability to apply its own methodology. Social Security sources insist on the value of the Commission's report.

However, regarding the calculation of revenue, the same sources detect "prudence" on the part of Airef. In this case, the supervisory body does have more leeway to determine what to include or leave out of the calculation. For example, the Tax Authority has taken into account the increase in all social security contributions, especially those for high incomes, but also issues such as the rise in the minimum interprofessional wage (it notes that this has provided a boost in terms of income and, therefore, contributions). However, it has not fully taken into account the transfers from the State to the Social Security fund to cover so-called "improper expenses." A decision that Social Security sources question: "The law makes it very clear that transfers are revenue."

What about sustainability?

But Airef's cold shower on the Spanish government comes, above all, regarding the sustainability of the pension system in general. The organization warns that it has not improved compared to the last analysis it conducted in 2023. To justify this, Airef focuses on the growth in the money spent to cover benefits, especially pensions. Specifically, it points out that pension spending will grow by 3.4 percentage points of GDP until 2050 (from 12.7% of GDP in 2022 to 16.2% of GDP in 2050), which represents a slight increase compared to the analysis conducted two years ago. It also questions its fairness (that future generations will have to foot an excessively high bill to meet the expense).

One of the reasons that generates more uncertainty in the Airef is the current demographic evolution in Spain, marked by the fall in the birth rate, which contrasts with the growth of retired people due to the effect of the generation of the baby boomIn the eyes of the agency, the growth of the Spanish economy will be key, that is, whether the labor market remains strong, but also migration flows. "Both scenarios are subject to extremely high uncertainty," notes Airef. "We are not complacent, and it is clear that there are uncertainties [along the way], but we are hopeful about the reform," reiterates the Social Security authorities.