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The Bank of Spain asks to compensate cuts in pensions with more income

Governor Luis Linde contends in Congress that the key to reform of the system must depend on a balance between adjustments and collection measures

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The Bank of Spain asks to compensate cuts in pensions with more income

In his appearance before Congress to analyse state's general budgets, Linde explained that population ageing will shoot public spending on pensions, health and long-term care to environment of 21% of GDP in 2050. These are calculations of European Commission, which now numbers se items in environment of 19% of GDP. In addition, Governor stressed that reforms adopted would, in a favorable economic context, reduce gradually Social security deficit, currently located in environment of 1.5% of GDP.

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"However, in absence of additional income increases, adjustment would occur mainly through a decrease in rate of substitution of public pensions," he said. That is to say, as Commission also points out, relationship between average pension and average salary would be cut, which according to experts could entail a significant loss of purchasing power. Or in or words, same level of spending on GDP would be maintained for almost double pensions. For this reason, Linde has stated that in future " key is to strike a balance between replacement rates of our pension system that are intended to secure and revenues needed to ensure sustainability of system."

Or what is same, he has recommended that adjustment not only rest in cuts, as is now factor of sustainability — which decreases initial pension depending on how much life expectancy increases — and with annual revaluation rate of PR Stations — linking updates to state of Social security accounts — According to Commission, se reforms, toger with those of 2011, ensure that expenditure on GDP in pensions is contained over next 30 years.

Although he has argued that tax basket needs to be reordered, governor has not indicated how much revenue should be raised, leaving it in hands of Congress. Having said that, he has warned that in order to maintain current rates of replacement of pensions, "which are very high in international comparison", it would require "very significant increases in system's income". It is clear that it would not be enough for initiatives to fatten up collection. And he added: "In any case, it is desirable that any reform strategy chosen will increase system's transparency, reinforce relationship between contributions and benefits, and maintain an adjustment mechanism that ensures financial equilibrium." Especially when, according to Linde, Spanish economy still presents important "imbalances, such as high public indebtedness, external financing needs and persistence of still very high levels of unemployment".

Linde has detailed that disbursement in tax pensions will rise this year by 3.5%, which would make weight of spending on retirement benefits on total state and Social security rise by 2018 to 40.9% compared to 40.5% of previous year.

The budgets of 2018

The governor has also underlined that revenue forecasts of 2018 budgets appear "optimistic." "They always fit surprises," he admitted. But it has argued that projection drawn "would mean a response from collection to activity higher than that observed historically." It has refore urged Government to pay attention to deviations from public deficit to act quickly if y appear. This vigilance is even more important because expenditure is very decentralized, and it is necessary to have also accounts of or administrations to get a better idea of budgetary estimates, it has nuanced.

As to wher budgets are expansive or not, Linde has argued that fiscal policy in 2018 could be neutral or slightly expansive. "Consequently, in 2018, re would be no progress in reducing still high structural deficit of Spanish public administrations," he said. And he recalled that achieving budgetary equilibrium is "fundamental to recovering margins of fiscal policy manoeuvre in face of eventual adverse growth scenarios." If normalization of financial conditions and demographic impact is added, "It is more evident that process of public debt must be a priority", has concluded maximum responsible of entity.

On or hand, Linde pointed out that "public investment is big game sacrificed with crisis, and it is a clear goal for all to recover." "And not just public work," he added.

The socialist spokesman, Pedro Saura, has reproached governor who is supervisor of financial system and who does not provide a single data of how this has affected public accounts, eir by spills of bank bailout or tax credits granted. In face of questions, Linde has not specified any figures.

Challenged by evolution of wages, Linde has recognized: "They do not rise as we would like." But he has insisted that re are reasons for that. On one hand, it has blamed to factors such as low inflation, part-time development, globalization or new technologies. On or, it has argued that it is "a global phenomenon." In any case, he has warned that Spain "cannot decide on its own a different wage evolution from countries that surround it".

As for communities, Linde has demanded that its financing be reformed to adapt its income to its expenditures, improve transparency and increase its fiscal co-responsibility. It has also felt that autonomy should return to markets, leaving behind various support funds developed during crisis. In any case, as long as y are in operation y should be conditioned to budgetary containment measures.


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