: Parliamentary recommendation to revalue the level of in line with the consumer price index ESPN Flash Report 2018/64

JULIA MONTSERRAT CODORNIU AND GREGORIO RODRÍGUEZ CABRERO – ESPN DECEMEMBER 2018

Description variation in the CPI. The additional On 10 October 2018, economic cost is estimated at €1.6 the Parliamentary The Parliamentary Commission of the billion for this year. Commission of the Toledo Pact was created in April 1995 to Toledo Pact approved The Commission of the Toledo Pact reach consensus on a permanent reform the Recommendation returned to the 2011 recommendations. of the Public System (PPS) in on the “Maintenance On 10 October, it approved Spain by means of Recommendations of the purchasing Recommendation No 2 on the that were broadly applied until 2011. power and “Maintenance of the purchasing power improvement of In January 2011, this Commission and improvement of pensions”, pensions”, according recommended that pensions be according to which pensions will be to which the annual revalued annually on the basis of the revalued annually on the basis of the revaluation of consumer price index (CPI). However, CPI, as a way of preserving the pensions will be based in 2013 the government did not take purchasing power of pensions. This on the consumer price this recommendation into account, but Commission considers that “the index. This established a new Pension Revaluation sustainability of the system requires Recommendation has Index (PRI) calculated according to the that only the expenses corresponding to reopened the debate financial balance of the PPS. Its value the strict maintenance of the on the future varies between a minimum increase of purchasing power of pensions be sustainability of the 0.25 %, and a maximum which could be financed from Social Security Public Pension System the consumer price index plus 0.5%. resources”. in Spain. The PRI formed part of the package of measures making up the 2013 Spanish Outlook & commentary

pension reform, enshrined in Law The Recommendation, which has not 23/2013. The PRI entered into force on yet been implemented, responds to the 1 January 2014. demands from the pensioner population, thereby restoring social With low inflation rates, this index did peace. It also re-establishes a relative not affect the purchasing power of “institutional balance”, since the 2013 pensions between 2014 and 2015, but pension reform was decided without the has done so since 2016. Due to consensus of the Toledo Pact. The demands and protests by pensioners’ Commission has not yet completed the LEGAL NOTICE organisations and coinciding with the set of Recommendations on reform and change of government in June this year, This document has been sustainability of the PPS. The latter is prepared for the European pensions have again been updated the subject of intense political debate Commission. However, it according to the CPI (a temporary reflects the views only of the (European Commission, 2018). authors, and the Commission measure). In July 2018 the government cannot be held responsible topped up the initial PRI of 0.25% with The PPS has been in a situation of for any use which may be 1.35% for contributory retirement structural deficit since 2010. This is made of the information pensions and 2.75% for minimum and partly a consequence of the increase in contained therein. non-contributory pensions in order to the dependency ratio (a 2.62 realign these with the expected

percentage point increase between index applied between 2014 and 2010 and 2017), the fall in 2017 and the sustainability factor Further reading employment, the devaluation of (intergenerational equity factor), European Commission (2018), The wages and the high levels of the application of which was 2018 Pension Adequacy Report: temporary employment. Between foreseen in 2019, although the current and future income adequacy 2008 and 2017, expenditure on Government has postponed it to in old age in the EU, Vol. 2 Spain, pensions increased by 45% and 2023. pp. 85-95. the pensioner population by 12%. For this reason, most debate has Ferreras Alonso, F. (2018), “Hay The contributing population focused on revenue. One option is (Otras) soluciones para el sistema decreased by 17% in the same to increase the contribution rate, de pensiones” [There are other period and the revenue from Social solutions for the pension system], but this does not seem desirable Security contributions fell by 7.5%. Agenda Pública, 6 April 2018. because of the resulting increase in These contributions in Spain are the cost of labour. The debate has Governor of the three percentage points lower than therefore focused firstly on (2017), “Appearance in the the average for Eurozone countries rationalising expenditure (e.g. the Commission of the Toledo Pact on (Ferreras Alonso, 2018). The state, not the Social Security 15 February 2017”. Parliamentary system had a deficit of 1% of GDP proceedings nº 120, 15 February System, is to subsidise active in 2012, and of 1.8% in 2017. This 2017, Session No 19. employment policy contributions) deficit has been partially offset by and, secondly, on the development Hernández de Cos, P. and Jimeno, the Social Security Reserve Fund of alternative ways of financing J.F. (2017), “The public pension established in 2000. This fund has pensions, such as through taxes, system in Spain: Current situation, been almost exhausted, shrinking either general taxation or new challenges and alternatives”, from €66.814 billion in 2011 to taxes. This latter alternative is Occasional Papers, No 1701. Bank €8.095 billion in 2017. The PPS has of Spain. preferred by the public financial had to resort to consecutive loans authorities (Governor of the Bank Montserrat Codorniu, J. (2016), “La from the state to cover the deficits. of Spain, 2017). Such financing enésima reforma de las pensiones: The debate on the sustainability of could be through indirect taxes Mayor empobrecimiento de los the PPS can address expenditure or (Hernández Cos & Jimeno, 2017) pensionistas” [The nth pension revenue. In terms of expenditure, or through the entire tax system reform: Major impoverishment of pensioners], Agathos: Atención it does not seem possible for the (Ferreras, 2018; Rodríguez sociosanitaria y bienestar, Año 16, government to intervene without Cabrero, 2017; Zubiri, 2016). This No 4. seriously compromising the latter proposal would follow, for purchasing power of pensions and example, the financing trends in Rodríguez Cabrero, G. (2017), increasing poverty rates France and Germany. “Appearance in the Commission of (Montserrat Codorniu, 2016). the Toledo Pact on 22 March 2017”,

Hence the questioning of both the Parliamentary proceedings no. 120, 22 March 2017, Session No 23.

Zubiri, I. (2016), “Las pensiones en España: Situación y alternativas de reformas” [Pensions in Spain: Situation and alternative reforms], Papeles de Economía Española, No 147.

Author

Julia Montserrat Codorniu (Centre of Social Policy Studies, Barcelona) and Gregorio Rodríguez Cabrero (University of Alcalá, Madrid)

The Flash Reports are produced by the European Social Policy Network (ESPN) established in 2014 to provide the European Commission with independent information, analysis and expertise on social policies in 35 European countries. The topics covered are identified by ESPN experts in the light of significant developments in their countries, or in some cases suggested by the Commission or the Flash Reports’ editorial team (Eric Marlier, Slavina Spasova and Bart Vanhercke). The ESPN is managed by LISER (Luxembourg Institute of Socio-Economic Research), APPLICA and the OSE (European Social Observatory). More information on the ESPN: http://ec.europa.eu/social/main.jsp?catId=1135&langId=en.