The Bank of Spain warns that the pension system requires further adjustment

The Bank of Spain considers that the reforms that the Government is undertaking in the pension system will not be enough to clean up their accounts and that dealing with the increase in benefits that will result from population aging “will require new actions in the future on the income side [cotizaciones sociales]expenses [prestaciones] or both”. In addition, it considers that it would be convenient to introduce “automatic adjustment mechanisms” that provide more certainty to the cleaning up of the system, beyond the so-called “intergenerational equity mechanism” introduced by the Government, where the possible spending measures that may be necessary from 2032 should be negotiated and approved at the time.

This is just one of the observations that the Bank of Spain has included in its Annual reportof 300 pages, published this Wednesday in which, beyond the concern for the sustainability of public finances -in general- and the pension system -in particular-, the supervisory body underlines the enormous uncertainty that the ukrainian war has added to the economic recovery and the pernicious effects of inflation on the income of families and companies and on the growth of the activity. To provide an economic policy response to these challenges, the Governor of the Bank of Spain, Pablo Hernandez de Kos, appeals to the construction of “great political and social consensus” in his presentation of the report. “The uncertainties generated by the war in Ukraine and those that still persist derived from the pandemic – two absolutely extraordinary events – demand it,” he concludes.

New prospects in June

Such is the uncertainty, that after having lowered its growth forecast for this year of the Spanish economy (from 5.1% estimated in December to 4.5% in April), a new cut is already announced in the perspectives that the body will publish in June, according to the general director of Economy and Statistics of the entity, Angel Sparrowhawk, without wanting to specify whether the new projection will coincide with the last one formulated by the Government, of 4.3%, or will be closer to the 4% estimated by the European Commission. The ‘prick’ of GDP growth in the first quarter is at the origin of this downward correction. The Bank of Spain had estimated a quarterly growth of 0.9%, which the INE data left at just 0.3%.

The new outlook will also review the Bank of Spain’s latest forecast for inflation (in April it estimated an average rate of 7% for this year). On the one hand, the body intends to incorporate the novelties that have to do with a greater Underlying inflation (inflation without the more volatile energy and unprocessed food prices reached 4.4% in April) and the consequent concern about a more persistent rise in prices over time. The new prospecting also intends to incorporate the foreseeable moderation effect of the electricity bill after the cap on the price of gas adopted by the Government.

Salaries and benefits

There is agreement in the forecasts of all the organizations in which inflation it will moderate radically in 2023 to approach around 2%. In any case, the governor of the Bank of Spain insists on the need for the social agents to reach an income pact so that employers and workers share equally the impoverishment derived from inflation imported from abroad through the energy bill, food and raw materials.

Employers and unions have abandoned the negotiation of a State Collective Bargaining Agreement (AENC) for the period 2022-2024 in which it was intended to crystallize such an income agreement. However, from the perspective of the Bank of Spain, there are indications that such an income agreement “is taking place tacitly.” On the one hand, the collective bargaining data shows the loss of purchasing power of wages (until April, wages agreed between employers and unions averaged an increase of 2.4%). On the other hand, the Bank of Spain Survey on Business Activity (EBAE) anticipates “that companies are not transferring all the increase in their costs to their prices,” says Ángel Gavilán, after having received a 4.5% cut in margins in the fourth quarter of 2021 (according to data from the statistics from the Central Balance Sheet).

Limit the increase in pensions

The Bank of Spain raises incorporate pensions into the income agreement which should serve to distribute the costs of the inflation derived from the energy crisis. In this sense, it is proposed “that purchasing power be guaranteed for those receiving minimum pensions”, but it is warned that extending this practice to the entire group -as established by the Social Security reform- “necessarily entails that other agents of the national economy (the recipients of labor and capital income) have to assume a greater part of these costs”. At the moment, the Government foresees a rise in pensions in 2023 of around 6%, in line with the average inflation estimated for 2022.

Related news

The guarantee of the purchasing power of pensions and the repeal of the sustainability factor inherited from the PP are part of the first round of reforms already adopted by the Government. Measures have also been taken to bring the effective retirement age closer to the legal age. The second part of the reform of the pension system contemplates a series of additional actions, which must be specified throughout this year. Among them, measures such as the development of employment pension plans, the review of the maximum contribution bases and the maximum pension, a new contribution system for self-employed and a review of period considered to calculate the regulatory base of the pension.

Beyond these reforms, the Bank of Spain considers that new actions will be necessary in the future “on the income side [cotizaciones sociales]expenses [prestaciones] or both”, to guarantee the sustainability of the system. In this sense, it is proposed, for example “strengthen the link between contributions made and benefits receivedensuring a sufficient level for the most vulnerable households”, as well as “initiate a rigorous debate” that addresses the level of benefits that the system must provide and the strategy for obtaining the necessary income to finance them.