More reforms more taxes

Until next spring we will not know the criteria of the European Commission regarding the sustainability of the public pension system

The Spanish press has reported on the written response of the European Commissioner for Economy, Paolo Gentiloni, in the news for his concern about the sustainability of the pension system introduced by the Intergenerational Equity Mechanism (MEI) and he warns that he will suspend payments of European recovery funds if Spain does not meet budget targets.

Unlike the Sustainability Factor, which calculated benefits based on the increase in life expectancy, the system that replaces it will only be activated if necessary and temporarily. It will be financed in the 2023-2032 period with contributions from employers and workers, and its funds will serve to address deviations in pensions for the 2033-2050 period. If it is not necessary, social security contributions may be reduced or benefits improved.

It is difficult to understand Paolo Gentiloni’s response without the explanation that the pension expenditure of the General State Budget for 2023 allocates forty euros out of one hundred euros of total expenditure. The Intergenerational Equity Mechanism, except for its name, does not in itself attempt to balance the cost of pensions between current and future beneficiaries. The ultimate objective of the MEI is to collect social contributions during the working period of current workers, in order to cover the political commitments to increase pensions based on inflation. Politics once again determines what technical solutions must be implemented to make the Spanish pension system sustainable.

The reform of the public pension system is one of the pillars of the Recovery Plan. The real mechanism for measuring solidarity between generations, of those who are collecting their pensions after finishing their working life who in turn were financing the pension payments of their predecessors, will be the fiscal impact. But that fiscal impact not in the coming months but in the decades to come. Until next spring and with the request for the fourth payment by the Spanish Government, we will not know the criteria of the European Commission on the sustainability of the pension system. In any case, a scenario of a broad majority can be anticipated with EU countries with fiscal deficits above 3%, Spain among them, and the need for more reforms to collect more taxes. The MEP who asked the question to the European Commissioner argued that the average pension has increased by 43% since 2008, while the average salary has only increased by 15%.

Jaume Quibus

The actuary and economist Jaume Quibus holds a master’s degree in Financial Economics and Accounting, a degree in Actuarial and Financial Sciences, a degree in Economic and Business Studies from the University of Barcelona and has completed the Management Development Programme at the IESE Business School of the University of Navarra. He is a full member of the following associations: the Catalan Actuarial Association, the Spanish Actuarial Association, the Catalan Economists Association, the International Actuarial Association, the Catalan Association of Accounting and Management and also a member of the IESE Business School Alumni. He was a founding partner in 1998 of the actuarial company Quibus, and is corporate member number 6 in the Catalan Actuarial Association.