The IMF warns of the ‘Escrivá plan’ for pensions: the reform will raise spending by 42,000 million

The International Monetary Fund (IMF) warns the Government of Spain about the pension reform, which will make the System more unsustainable if complementary measures are not taken on spending and income. In this way, it disfigures the cabinet led by the Minister of Inclusion, Social Security and Migrations, José Luis Escrivá, that “the pension reform has prioritized social acceptability and sufficiency, but concerns remain about sustainability in the event that no additional measures are implemented “. The agency assures that only the measures approved in the first package that will enter into force from January 1 will mean an increase in the spending of 42 billion of euros, that is, about 3.5 percentage points of GDP.

Specifically, the international body warns about the effects that the indexation of pensions to the CPI will have in the medium term, on the one hand, and the repeal of the sustainability factor, on the other. It should be remembered that, currently, State spending on pensions amounts to 13 percentage points of GDP, although once the effects of the current reform have been deployed, this level would grow until reaching a 16.5% of PIB.

“According to the current reform proposal, pensions are will be permanently indexed to inflation of the consumer price index (CPI) and the sustainability factor will be revoked from 2021. This would increase annual spending on pensions by 3.5 percent of GDP between now and 2050, compared to the full implementation of the previous legislation, “the Fund points out in a statement by the agency’s technicians on the specific case of Spain.

Insufficient reform

The insufficiency of some measures adopted is also exposed in this document, which, although they seem well directed towards the final objective of improving the financial sustainability of Social Security, are seen as meager for the challenge that the social protection agency will face in the next few decades. According to notes from the Bank of Spain, the process of retirement of the cohort of baby boom It could cause a financial imbalance at its maximum intensity of more than 50,000 million euros.

In fact, the Fund seems skeptical about the impact that the application of the new intergenerational equity mechanism will have on the public coffers and on the consolidation of Social Security finances. Thus, on the one hand, the rationality of the measures points out, ensuring that “part of the increase is expected to be offset by other measures proposed in the first phase of the reform, such as the introduction of incentives to raise the effective retirement age and increase temporary Social Security contributions“Although in this same report he assures that” some of the possible additional measures are the adoption of mechanisms to restrict spending (for example, prolong working life more) and increase income (such as increasing the maximum income subject to contributions), assuming that this increase in contributions in the form of contributions should increase to underpin improved revenue. Or apply a cut in spending on benefits to sustain the Accounts.

“Preserving the sustainability of public finances requires additional efforts to counteract spending pressures in pensions, which would also help give a signal of the authorities’ commitment to fiscal responsibility “, warns the Fund in line with the fact that the first phase of the reform of the public pension system in Spain is far from being aligned with the claims or historical recommendations from global organizations such as the OECD or the European Commission itself, which already in the country-specific recommendations had been calling for a reform of the system, yes, in the opposite line to the increase in spending.

The second leg, crucial

In this way, the IMF comes to warn the Government that the pension reform could be in the water if the element of sustainability in the second round of negotiations with the social partners. “It is expected that some of these measures will be incorporated into the second phase of reforms in 2022,” says the Fund, clearly referring to the measures to be adopted that would have an impact on the Social Security balance.

Specifically, the body focuses on the progressive rise in maximum bases of contribution that could rise to 60,000 euros per year and would be a spur for the collection of the public body, on the one hand. And, on the other hand, the increase in years listed for the calculation of the regulatory base of the pension, foreseeably up to 35 years of contributions, which will imply reductions in the initial benefits of new pensioners.

“If no discretionary measures are taken, the public deficit is expected to remain above pre-crisis levels in the medium term. A sustained and gradual process of fiscal consolidation once the output gap is closed and the economy has entered a path of sustained growth, “warns the IMF.