It will account for 14% of GDP, almost two points more than before the pandemic, according to a Fedea study that indicates that each additional point of the CPI represents 1,700 million more
The Spaniards are losing purchasing power due to the large rise in prices that wages are not accompanying. The only ones who will maintain their purchasing power -if the Government does not change the decree between now and November- are pensioners, whose payroll will be updated according to the CPI.
The latest data for March brought prices to 9.8%, a rate that will moderate but will end the year at around 7.5%, as confirmed this week by the Bank of Spain. In this way, revaluing pensions with the CPI will mean an extra expense for the public coffers that Fedea has quantified at 188,500 million euros, which means 14% of GDP, 1.7 points more than the pre-pandemic level.
It will mean adding more than 18,000 million to an already bulky bill, whose budget for this year is 170,494 million. These are more pessimistic forecasts than those that Funcas launched a few weeks ago, which warned that pension spending would increase by 10,000 million next year due to its revaluation to the CPI. In Spain, Social Security currently disburses more than 10,700 million euros in pensions per month, so according to Fedea’s calculations it will almost mean adding two more payments to the account.
And this assuming that the inflation figure is 6%, since in a worse situation public spending would increase. Specifically, each additional point of the CPI would increase total spending on pensions by around 1,700 million euros, 0.12% of GDP, according to the Fedea report published this Friday.
The State currently spends almost 11,000 million euros per month to pay pensions
This situation would further worsen the unbalanced Social Security accounts in 2023, whose deficit would stand at 1.2% of GDP, some 15,200 million euros, despite the high state transfers -of almost 18,400 million- destined to cover the improper system expenses. In fact, if this concept is excluded, the deficit would increase to 2.6% of GDP, to exceed 33,500 million euros. “If this scenario were fulfilled, the pension system would show a strong imbalance just before the ‘baby boom’ generation began to enter retirement age, with the consequent increase in the rate of growth of spending,” says Professor Miguel Ángel Garcia, study author.
In addition, this higher public spending affects the budget balance of the Administration as a whole. Public spending on pensions, which absorbs a third of the total, will be a challenge for already compromised accounts. The 2022 deficit will remain at 6.7% this year and the debt at 118% of GDP, with the possibility of maintaining the deficit at around 4.5% structurally.
An “inconsistent” measure
For this reason, García indicates that the Spanish pension system “does not have a close relationship with the evolution of the economy”, which explains the replacement rate “highest in the countries of the eurozone”. In addition, with the arrival of two unforeseen crises such as the pandemic and now the war in Ukraine shows the “inconsistency of the decision adopted in the last reform to isolate pensioners from economic developments by generating, if not accompanied by additional measures, significant negative repercussions on the financial sustainability of the pension system and a deterioration in equity between generations”, points out the URJC professor.
Some organizations such as the Bank of Spain have already requested that the suitability of applying this revaluation of pensions according to the CPI be reviewed, a measure that came into force only a month ago. However, the government ministers rule out this possibility in any public appearance in which they are asked about it. The experts have also requested that pensioners participate in the income pact that workers and businessmen are negotiating to avoid the inflationary spiral, but for the moment it is an issue that is also ruled out by the Executive.
Eddie is an Australian news reporter with over 9 years in the industry and has published on Forbes and tech crunch.