Escrivá's reform raises spending and puts future pensions at risk
The Minister of Social Security, José Luis Escrivá. /
Actuaries join the criticism and maintain that the revaluation with the CPI threatens the sustainability and fairness of the system in 20 or 30 years
The pension reform designed by the Minister of Social Security, José Luis Escrivá, has a new detractor: the Institute of Spanish Actuaries, which joins the critical side in which the Bank of Spain, the European Central Bank (ECB), the European Commission, the AIReF, the CEOE, the OECD...
«The Escrivá reform unprotects future pensions and does not guarantee the fairness of the Spanish model». It is the harsh diagnosis made by a report published this Wednesday by the college of actuaries, the group dedicated to projecting and managing economic risks and analyzing their financial impact, always from a scientific point of view and based on the most likely evolution that can be wait in the system.
For this organization, the recently approved first phase of pensions, which again revalues benefits with the real CPI and replaces the sustainability factor with a new intergenerational equity mechanism, reinforces the sufficiency of pensions, which in its opinion is «positive», but, nevertheless, «regresses» in strengthening the sustainability (present and future capacity of the system to meet the commitments it acquires) and equity (actuarial equivalence between what is delivered and what is received) of the system, two «key» aspects » that, in the medium-long term (20 or 30 years), endanger the adequacy of pensions, that is, the system's ability to provide retired people with a standard of living similar to that they had when they were active and that protect them from situations of poverty.
This is a consequence of the fact that the measures implemented by the Government will cause an increase in Social Security spending, above all as a consequence of the annual increase in pensions with inflation, but also due to the repeal of the sustainability factor. At the same time, the changes made to the rule on delayed and early retirement – the great hope of Escrivá to increase collection – are going to generate an “uncertain result” and will mean “only a small decrease in spending, in the best of cases”.
The report analyzes the impact that the reform has on the Spanish pension system through the four main elements that can be studied from this financial-actuarial point of view: the revaluation of pensions, delayed retirement, early retirement and the mechanism of intergenerational equity (MEI).
The actuaries consider that the revaluation with the CPI "erodes" and "threatens" the sustainability of the system. They point out that the maintenance of the purchasing power of pensions is an objective that must be present in the minds of all representatives of the citizenry, but, at the same time, they make it clear that for this there must be a "correct" quantification of what this measure may entail and who will bear this cost.
In this sense, the tenured professor of Financial and Actuarial Economics, Enrique Devesa, argues that the high effort that will be involved in revaluing pensions with the CPI – which could mean raising them next year to above 8% – should be known to all, because the implications of this rule not only affect the current generation of contributors, but will extend for several decades.
Criticism of the new sustainability factor
In the same way, the report charges against the new equity mechanism, which supposes an increase of six tenths of social contributions during the next few years that will be used to fill the 'piggy bank' of pensions, since "it does not result in an improvement of the pension” and if it is compared with the sustainability factor, it will give rise, in 2067, to an accumulated deficit up to that moment of 7.75 points of GDP for that year.
In addition, they criticize the new scheme that "penalizes" delayed retirements since the rewards for delaying retirement should be "more generous", around 5.4% per year, compared to the 4% set by the reform. Likewise, they consider that the early retirement model follows an "unreasonable criterion" and their proposal is to establish a single coefficient of 0.45% for each month in advance.
For all these reasons, the actuaries advocate that the 2021 reform can be “completed, nuanced or even modified if, as the calculations indicate that it could happen, it is revealed as not adjusted to the objective of designing an adequate balance between present and future beneficiaries. of the system".
