Fairer and more sustainable pensions

The coalition government between the PSOE and Unidas Podemos has scored another success on Monday by closing a first agreement on pension reform with employers and unions. In this case its architect has been the Minister for Inclusion and Social Security, José Luis Escrivá, who after months of negotiations has unblocked one of the issues that raises more dilemmas and more doubts about the Spanish economy. It is true that many thorny aspects, such as the new system for calculating pensions, have been left for a second phase of the negotiations, but from the outset, basic aspects have been agreed that indicate where the future pension system has to go in order to be fairer and more sustainable.

Firstly, pensions will once again be revalued in line with the CPI, thus preventing them from losing purchasing power. This buries the reform approved by Mariano Rajoy in the midst of the economic crisis, which set a minimum revaluation of 0.25% but without any commitment to relating this increase to inflation. In practice, therefore, in times of crisis, pensions, a basic pillar for the subsistence of millions of families, could lose purchasing power. And the second aspect, and surely the most important, is that it declares war on early retirement by means of tax penalties, on the one hand, and incentives to extend working life, on the other.

Escrivá's thesis is that the Spanish pension system is sustainable as long as the real retirement age (now the average is 64.6 years) is brought closer to the legal age, which is now 67. For too many years there has been an abuse of early retirements, especially in large companies and in sectors such as banking, which have taken people out of the labour market who still had a lot to contribute professionally and who were often still in their fifties. This fact, added to one of the highest life expectancies in the world (which was 84 years before the pandemic and is now 82.4), has placed a heavy burden on the Social Security coffers, to the point of threatening the system itself. This is because when the system was designed, life expectancy was very close to retirement age, and therefore had to be paid for much less time.

Among the measures to make the system more sustainable, it has also been agreed that so-called improper expenses, such as non-contributory pensions, will be covered by the general state budget, which will contribute 2% of GDP, some €21bn euros. It is true that in this way spending is transferred from one place to another, and we will have to think about how to compensate fiscally, but it also ensures the sustainability of the Social Security fund in the long term. Escrivá's objective is that, when the new system is fully reformed, it will serve to make pensions for the next 25 years, that is, during the period in which the generation of Among the measures to make the system more sustainable, it has also been agreed that so-called improper expenses, such as non-contributory pensions, will be covered by the general state budget, which will contribute 2% of GDP, some €21bn euros. It is true that in this way spending is transferred from one place to another, and we will have to think about how to compensate fiscally, but it also ensures the sustainability of the Social Security fund in the long term. Escrivá's objective is that, when the new system is fully reformed, it will serve to make pensions safe for the next 25 years, that is, during the period in which the baby boomer generation, the largest in history, will retire. This was, therefore, a reform that was as necessary as it was urgent.