Fedea warns that excess pension spending will lead to a rise in contributions between 3 and 4 points in 5 years

According to his projections, the MEI's safeguard clause would have to be activated only two years after its approval

MADRID, 3 May. (EUROPA PRESS) -

The Fundación de Estudios de Economía Aplicada (Fedea) has prepared a series of projections that suggest that excess spending on pensions will lead to higher contributions between 3 and 4 points in five years as a result of the activation of the safeguard clause of the Intergenerational Equity Mechanism (MEI), which would have to come into operation only two years after the approval of a reform "supposedly designed to guarantee the sustainability of the system".

Based on the projections of the 2021 European Union Aging Report and its estimates on the impact of the pension reforms adopted in this legislature, Fedea calculates that, in the absence of additional measures, pension spending will reach 17 in 2050. .8% of GDP, a percentage that is 2.5 points higher than that forecast by the Ministry of Inclusion, Social Security and Migrations.

This figure of 17.8% of GDP, which would exceed the EU-27 average by 5.2 points, would place Spain at the head of European countries in spending on pensions, so that it would be 1.6 points ahead from Italy, in second position.

The increase in spending, which would not be sufficiently offset by revenue, would mean that the basic deficit of the system (that is, before State transfers) would stand at 6.3% of GDP in 2050, "absorbing the 52% of the net tax revenue of the State", according to Fedea.

On average, the Foundation estimates that the basic deficit of the system will be 4.4% of GDP between 2022 and 2050, which represents 100% of the State's net income from Personal Income Tax and 37% of its total net income, excluding the participations of the territorial administrations.

With these figures, Fedea advises, the MEI safeguard clause would be activated "immediately, demanding an increase in contribution rates of between 3 and 4 points in five years." However, the Foundation points out that this adjustment would leave the public pension system with a "still very significant" basic deficit, of 3.2% of GDP on average between 2022 and 2050 and around 5% in 2050.

"These results call into question the logic of a reform that would need important corrections from the moment of its approval, as well as the design of the correction mechanism, with a non-transparent activation condition and compatible with a still very high basic deficit", Fedea points out.

In the third and last report in the series that the deputy director of Fedea, Ángel de la Fuente, has dedicated to analyzing the budgetary effects of the reform of the pension system, the body recalls that the Government introduced in the last pension reform a safeguard clause within the MEI that, ultimately, forces prices to rise to prevent the system's deficit from skyrocketing.

This clause is activated if the expected average expenditure on public pensions exceeds the sum of 15% of GDP and the excess of extra income above 1.7% of GDP generated by the income measures adopted since 2020.

If this is fulfilled, the Government will be obliged to take measures to gradually correct the expected excess of spending. Thus, within a month, you must draw up a list of possible corrective measures and ask AIReF to prepare a report quantifying their impact.

Based on this report, the Government will negotiate with the social agents an adjustment plan that must be sent as a bill to Parliament for its entry into force on January 1 of the following year. If the law with corrective measures is not approved within the expected period, the additional contribution rate of the MEI would be increased immediately to compensate for 20% of the expected excess spending.

Fedea verifies in this report that the MEI safeguard clause would be activated from now on with the projections of the 2021 EU Aging Report and its estimates on the impact of the pension reform, since it calculates that, in a central scenario, the expected excess spending would be 0.93% of GDP.

To correct this deviation, it would be necessary to raise contribution rates between 3 and 4 points in five years, which would not prevent the system from still showing a basic deficit of 3% of GDP.

Contrary to Fedea's arguments, the Ministry of Inclusion's calculations suggest that the MEI's safeguard clause would not be activated for the moment and, therefore, it would not be necessary to increase social contributions.

"In the absence of important changes, what is foreseeable is that the next edition (of the EU Aging Report) will force the activation of the corrective mechanism of the MEI, only two years after the approval of a reform supposedly designed to guarantee the sustainability of the system ", says Fedea.

On the contrary, the Government considers that some of the hypotheses of the 2021 Aging Report are excessively pessimistic and should be revised upwards in the next edition, which would leave a much greater margin before the activation of the safeguard clause.

For Fedea, however, the results of his study "confirm and reinforce the message about the need for a more cautious pension policy."