Spanish pension reforms increase strains within coalition
Tensions have escalated within Spain’s government over pension reforms that Brussels expects to form a vital part of reform commitments Madrid must meet in return for billions of euros of coronavirus aid.
Podemos, the radical left junior partner in Pedro Sánchez’s Socialist-led government, insists it will not support changes to the calculations for payments that it says will reduce future pensions for millions of contributors.
But, in an interview with the Financial Times, José Luis Escrivá, Spain’s social security minister, said his pension plans had been mis-characterised. He argued that the broader reforms were crucial not just for winning the backing of Brussels, which is due to disburse some €140bn in recovery fund grants and loans to Madrid over the next six years, but also to address longstanding problems within the Spanish economy.
“These are reforms that had to be done in any case, even if there were no EU funds,” he said of Spain’s overall proposals to the European Commission. “The commission’s recommendations are a reasonable reflection of problems in Spain with bottlenecks to growth and fiscal sustainability.”
Frictions within the coalition over the issue are a sign of potential problems for the EU as it seeks to ensure that central and southern European countries — the main recipients of coronavirus recovery funds — embrace reforms as a quid pro quo for recovery fund cash.
The EU €750bn recovery fund is intended to prevent economic imbalances within the eurozone from getting still worse. It has been hailed as a game changer for countries such as Spain and Italy, which have been particularly hard hit by the pandemic while also having to wrestle with high public debt or deficits.
But northern EU member states have emphasised the need for accompanying reforms to deliver lasting improvements to the growth prospects of the recipients.
“This is not only about investments in the economy — it is about reforms necessary to make sure all of us in Europe can handle the next crisis much better,” said one EU diplomat.
If countries fail to deliver on reform plans agreed with the commission, it could trigger delays to the disbursements of cash scheduled for coming years.
Mr Escrivá highlighted Spanish proposals that range from tax, spending and administrative reforms to plans to increase the ease of doing business, as well as a bid to reduce the country’s reliance on temporary work contracts.
But the most contentious issue is the state pension. Spain’s social security system has been in deficit for a decade and pension payments, which at present account for 12 per cent of gross domestic product, are set to increase as the Spanish population ages. While last year people over 65 accounted for just under one in five of the population, by 2050 the proportion will be almost one in three.
Pablo Iglesias, the Podemos leader and Spain’s deputy prime minister, recently said his group would not support what he depicted as a proposal by Mr Escrivá and Mr Sánchez to increase the period of time used to calculate the value of state pensions from 25 to 35 years. Since people usually start their working lives at lower salaries than they end up with, such a change could reduce retirement pensions.
“Podemos is not going to vote in favour of a pension cut in Spain,” Mr Iglesias told Spanish television, adding that he owed his position to his grouping’s 2019 coalition agreement with the Socialists, which committed the two parties to increasing the purchasing power of the lowest pensions. “Anyone planning such an action is going against . . . a contract we have made with the citizens.”
Mr Escrivá countered that the main thrust of his pension proposals consisted of other measures — notably removing disincentives for people to work up to and beyond the statutory retirement age of 66. He added that the social security system’s deficit had largely been eliminated by shifting unfunded transfers of €14bn a year to the general government budget. But he acknowledged that the retirement of baby boomers was set to produce a new deficit from around 2025 to 2048.
The minister dismissed the debate over the pension calculation period as “a completely minor issue”. He said his ministry had as yet made no firm proposal on extending the period but was following up on a recent cross-party agreement to strengthen contributions to the social security system: “This has led us to start looking at longer periods for calculating pensions, beyond 25 years . . . not for 35 years but for a few more years.”
He also argued that in some instances — such as when people’s earnings have dipped — pension payments could increase as a result of such a step.
Nevertheless, the tension between the two coalition partners on the issue highlights growing strains between the Socialists and Podemos that could complicate Spain’s reform programme more generally.
Last month, Mr Sánchez’s government finally won parliamentary approval for its budget, an accomplishment that bolstered the coalition’s hold on power but allowed antagonisms between the two parties to resurface.
The new Spanish budget also allows the government to borrow €27bn against future grants from the EU recovery fund months before the bloc begins paying out — a move that could reduce the effectiveness of any bid by Brussels to link grants to structural reforms.
Valdis Dombrovskis, one of the EU’s executive vice-presidents, said this week that recovery fund disbursements would be subject to the achievement of “specific and measurable milestones” and that there remained “a lot of work ahead”. Some member states needed to be more precise in setting out exactly what events would trigger payments, he added.
Member states are due to submit final versions of their so-called recovery and resilience plans by April, setting out both their request for EU funds and proposed investments and economic reforms.
Mr Dombrovskis said that 11 member states have now presented first drafts of such plans, which are guided by country-specific recommendations previously made by the commission.