In the economic arena, pensions were the winner, for better or worse, this week. On Friday, after learning advanced CPI data for November, the government announced that pensions would rise by 2.7% next year. This is because … Law No. 21/2021 issued on December 28 regarding ensuring purchasing power for pensions regulates the increase of these benefits each year based on the average inflation recorded between November of one year and the same period of the previous year. This increase will mean additional spending of about 5.2 billion euros for the public treasury.
This increase is not much different from the salary increase for civil servants – they just agreed to an 11% increase in four years – an average of about 2.7 per year… and the agreed-upon salaries increase this year by more than 3%, so the increase does not seem unreasonable. Perhaps the craziest thing is the way it is automatically linked to inflation, while most salaries are not. At least, yes, it was linked to a more stable measure of inflation than the annual CPI, which was the method used in the past to revalue pensions. If this indicator had been used, it would have increased by 3% instead of 2.7%.
In any case, this increase in pensions, and this increase in costs to the state, is accompanied by an increase in spending on benefits that results from the fact that the number of pensioners is increasing and that new pensioners are entitled to benefits higher than those received by those who die and leave the system. This explains that although pensions rose by 2.8% last year, spending on benefits grew by more than 6%. In these circumstances, and despite the significant increase in the collection of contributions, national and international organizations warn about the state of our pension system.
The OECD warned last Thursday that in just 20 years, starting in 2045, Spain will become the developed country that will have to allocate the largest proportion of GDP to pensions if reforms are not implemented, maintaining this status. At least until 2060. Specifically, the study predicts that in 2050 17.3% of GDP will be needed to pay pensions.
Given this situation, OECD economists suggested that Spain take measures such as modifying the benefits offered to those over 52 years of age, which give the right to contribute 125% to the simple minimum income index, because in their opinion they discourage workers who remain unemployed at the end of their working life from returning to the labor market. It is also proposed to raise the period taken into account to calculate the pension amount upon retirement to 35 years, as well as amending the retirement age to match the average life expectancy.
In a similar sense, in the same week, the Ruth Richardson Center, at the University of the Hesperides, advised our country to introduce automatic mechanisms that align benefits with demographics and income; Strengthening the individual savings pillars of the pension system and designing effective capitalization instruments; Strengthening the transparency of the pension system and encouraging the extension of working life by eliminating penalties and strengthening the link between effective contributions and the resulting pension.
The prescriptions exist, and although it is necessary to ensure a decent level of benefits for current pensioners, measures must be taken so that future retirees can start saving for their retirement.