Spanish government reckons pensions will rise by 4% next year

Pensions will rise next year by around 4% in Spain. This is the figure that the Spanish government has communicated to the European Commission in the report 'Projections of Public Spending on Pensions in Spain' and with which it puts an end to the reform of the system that began in 2021. It was the last step remaining to meet all the requirements to be able to receive another tranche of European funds.

The figure, however, is not yet definitive, due to the pending inflation data for October and November. But the Ministry of Social Security is convinced that the rise will be "in a range between 3.5% and 4.5%", bearing in mind that average inflation over the last nine months stands at 3.88%. "The variations can no longer be very large. It will not be 2% or 5%," pointed out sources from the department headed by José Luis Escrivá. But the sources added that "it is impossible to know what may happen in the coming weeks."

What they did state categorically is that this new historic rise, the second highest in the last fifteen years after the 8.5% this year, will materialise in the January pay cheque even if there is no government or general budget. And they also confirmed that minimum and non-contributory pensions will increase by more than the 4% that they expect average inflation to reach for 2023.

Despite the fact that this new revaluation will mean another extra draw on the pension system, which has already been under great strain for more than a decade, the government has ruled out activating the corrective mechanism introduced in the last pension reform, which would mean adopting cuts or activating additional revenue measures, such as raising social security contributions if spending shoots up more than expected.

According to the report, which still has to be approved by Brussels, this will not happen as Social Security spending on contributory pensions will not exceed 15% of GDP. The government projects that net spending on pensions will stand at an average of 14.2% of GDP between 2022 and 2050, but lowers this outlay to an average of 12.4% once the revenue generated by the measures implemented in the reform, such as the rise in maximum contributions, the new solidarity tax, the intergenerational equity mechanism (MEI) and the incentives to delay the real retirement age or the penalties for early retirement, is incorporated. This implies, therefore, that all these measures will mean an extra injection into the system of 1.8% of GDP per year on average over the coming decades.

The corrective mechanism included in the reform, which would involve additional increases in contributions, is activated when the difference between pension expenditure and expected revenue with the new measures exceeds 13.3%, a limit will not be exceeded, according to the government's projections. However, these differ greatly from those made by the Independent Fiscal Authority (Airef), which considers that additional measures will have to be taken as, in its opinion, expenditure will shoot above 16% of GDP.

But for Escrivá's forecasts to be fulfilled, the macroeconomic scenario he has drawn up must be fulfilled. The minister envisages economic growth of 2.5% over the next decade and much higher productivity than at present; he calculates that some 300,000 immigrants will arrive each year and that the labour market will have an employment rate of close to 80% for those in their forties, with an unemployment rate of 5.5% for those in their fifties, similar to that of other advanced countries such as Germany.

Moreover, the minister is counting on his measures working and the effective retirement age being pushed back to the point where workers over 65 will more than double. In this scenario, there will be an increase in the average retirement age of 1.6 years by 2050, according to the report.