July 30, 2021

The IMF warns that linking pensions only to the CPI can jeopardize the system | Economy

The IMF warns that linking pensions only to the CPI can jeopardize the system | Economy



The International Monetary Fund (IMF) is satisfied with the economic reforms that have enabled Spain to overcome the crisis; and he praises the growth of the country, still above the average of the eurozone. But, as happens in the rest of the world, the situation worsens month by month. And the technicians of the Fund, visiting in Madrid to prepare the document that will analyze the weaknesses and strengths of the Spanish economy, warn about the risk of reforms being reversed, both labor and fiscal adjustment, which Washington considers the secret of the Spanish success

In addition to the international risks that the IMF and other agencies have been pointing out for months – protectionist stagnation, a tougher monetary policy and the weakening of the situation in emerging countries – the body led by Christine Lagarde also detects intrinsically Spanish risks. "At the domestic level, the risks include the pressure to repeal the reforms and the continuation of a pro-cyclical fiscal policy," says the final declaration of the mission that has visited Spain.

The growth that the IMF foresees for this year is still strong, of 2.7%, even if it is one tenth less than what the Fund technicians previously predicted. This revision is explained by the weakening of domestic demand and the growing external difficulties. This forecast coincides with that of the Government and exceeds by one tenth the corrections made recently by the Bank of Spain and Funcas, the think tank of savings banks, which put the advance of the activity at 2.6%.

Up to 4% more spending up to 2050

Another hot spot in the report is in pensions. The Fund believes that the reform to re-link them with the inflation rate (CPI) "may jeopardize the sustainability of the system" if this change becomes isolated, without a comprehensive package that affects both the income and the expenses of the system. . The IMF estimates that this link between pensions and CPI would add between 3% and 4% of GDP to pension disbursements in the next 30 years. And that is why he believes that a disbursement of this magnitude has to be counteracted by other structural measures. Technicians also see it very difficult to reverse the trend of pensions gradually losing purchasing power.

"The economic cycle is reaching maturity and several downside risks overshadow the medium-term outlook," says the text that serves as a summary of this visit. Given this worsening, the technical staff of the Fund warns of the importance of two public policies considered "fundamental" to strengthen the resistance of the Spanish economy to the shocks that is about to suffer: to reinvigorate the fiscal adjustment and to continue with the spirit of the work reforms already put in place.

Address the duality of the labor market

The technicians that these days have visited Madrid unanimously praise the labor reforms promoted by the previous Government, to which, for example, they attribute around 20% of the increase in exports. Although the Fund criticizes that these reforms have not addressed with sufficient energy one of the main problems of the Spanish labor market: the duality between employees with fixed and temporary contracts.

The Fund is particularly concerned that the Spanish Government may move away from the path of consolidation of public accounts. It is true that, as acknowledged by the IMF's technicians, the reduction in the deficit of the last three years has been due only to the good situation of the economic cycle, and not so much to structural measures promoted by the Executive of Mariano Rajoy. And also criticizes that the volume of debt has fallen minimally in times of fat cows, when the economy grew strongly. "Therefore, the deficit target of 1.8% of GDP announced by the Government for 2019 is crucial and appropriate," said the text, which also adds that this process should continue until the debt begins a clear downward path.

The IMF advocates that the government take advantage of the situation – now that it is still good. And that is not forced to do when a new crisis hits the economy, being forced to adopt, as happened in the previous recession, saving measures that deepen the decline. "Constitute fiscal mattresses today will create more fiscal space for the future," he concludes.

Fund recommendations to guarantee pensions

The Washington-based institution notes that the pension reforms made during the crisis made the system more sustainable but have caused rejection among the population. However, he criticizes that the Toledo Pact has only linked the revaluation of pensions to inflation and has not produced a global package of measures.

In the opinion of Men in Black, the challenge of making the system sustainable requires touching many variables that condition Social Security accounts, such as attracting more immigrants, raising private savings, delaying retirement age by linking it to the evolution of life expectancy, increasing quotes of the self-employed, raise the prices of high salaries, increase the proportion of people working or improve productivity. But even those and other variables will not suffice: "Unless that additional increase in spending is fully matched, a future reduction in the benefit can be moderated but will not be completely avoided," he says.

In addition, the effects that these decisions will have on the distribution of income among young and old will have to be taken into account. The Fund recalls that retirees have been protected from the worst impacts of the crisis, while young people have suffered a terrible worsening of their income prospects. In the future, "fewer taxpayers will finance a number of pensioners upwards". Therefore, the body that runs Christine Lagarde insists that we must be clear so that contributors can take decisions about their retirement in time.

The Fund abounds, therefore, along the same lines as the Secretary of State for Social Security, Octavio Granado, and the Minister of the Economy, Nadia Calviño, who in these days have argued that it is necessary to link the evolution of pensions to more factors besides inflation. Granado cited the progress of the economy and income; Calviño also mentioned the demographic evolution, employment, salaries, the replacement rate and the number of years of contributions.

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