Thursday, May 6, 2021

Spain’s pension reforms increase tensions within the coalition

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Tensions have grown within the Spanish government over the pension reforms that Brussels expects to be an integral part of the reform commitments Madrid must meet in exchange for billions of euros in coronavirus help.

Podemos, the radical left junior partner of Pedro Sánchez’s socialist government, insists he will not support changes in payment calculations that he 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 poorly characterized. He argued that the broader reforms were crucial not only to gain the support of Brussels, which is expected to disburse some 140 billion euros in grants and loans from the stimulus fund to Madrid over the next six years, but also to solve long-standing problems in the Spanish economy.

“These are reforms that had to be done anyway, even if there were no European funds,” he said of Spain’s general proposals to the European Commission. “The committee’s recommendations reasonably reflect the 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 countries in central and southern Europe – the main beneficiaries of coronavirus recovery funds – adopt reforms such as counterpart for recovery funds.

EU € 750 billion in recovery funds aims to prevent the worsening of economic imbalances within the euro area. He has been hailed as a game changer for countries like Spain and Italy, which have been particularly hard hit by the pandemic while also facing high public debt or government deficits.

But northern EU member states stressed the need to support reforms to bring lasting improvements to beneficiaries’ growth prospects.

“It’s not just about investments in the economy – it’s about the reforms needed to ensure that all of us in Europe can better handle the next crisis,” said a European diplomat.

If countries fail to implement the reform plans agreed with the commission, this could lead to delays in cash disbursements planned for the coming years.

Mr Escrivá highlighted Spain’s proposals which range from tax, spending and administrative reforms to plans to make doing business more easy, as well as an offer to reduce the country’s dependence on temporary employment contracts.

But the most contentious issue is the state pension. Spain’s social security system has been in deficit for a decade and pensions, which currently represent 12 percent of gross domestic product, are expected to increase as Spain’s population ages. While last year people over 65 made up just under one in five of the population, by 2050 the proportion will be close to one in three.

Pablo Iglesias, leader of Podemos and Spain’s deputy prime minister, recently said his group would not support what he described as a proposal from MM. Escrivá and Sánchez to increase the time period used to calculate the value of state pensions from 25 to 35 years. . Since people generally start their working lives with lower wages than they finish, such a change could reduce retirement pensions.

“Podemos will not vote in favor of reduced pensions in Spain,” Iglesias told Spanish television, adding that he owed his position to the 2019 coalition agreement between his grouping with the Socialists, which urged both parties to increase the purchasing power of the lowest pensions. “Anyone planning such an action is going against it. . . a contract that we have entered into with the citizens.

66

The legal retirement age in Spain. The proposals remove the disincentives to work until the age of 66 and beyond.

Mr Escrivá countered that the bulk of his retirement proposals consisted of other measures – notably removing the disincentives for people to work up to and beyond the statutory retirement age of 66 years old. of 14 billion euros per year to the public administration budget. But he recognized that the retirement of the baby boomers was expected to produce a new deficit of around 2025 to 2048.

The minister dismissed the debate on the pension calculation period as “a completely minor issue”. He said his ministry had not yet made a firm proposal on extending the period, but was following up on a recent multi-party agreement to boost contributions to the social security system: “It got us started. to consider longer periods for the calculation of pensions, beyond 25 years. . . not for 35 years but for a few more years. “

He also argued that in some cases – such as when people’s incomes have fallen – pension payments could increase as a result of such a move.

Nevertheless, the tension between the two coalition partners on the issue highlights growing tensions between the Socialists and Podemos which could complicate Spain’s reform program more generally.

Last month, Sánchez’s government finally gained parliamentary approval for its budget, an achievement that strengthened the coalition’s grip on power, but allowed antagonisms between the two parties to resurface.

Spain’s new budget also allows the government to borrow € 27 billion against future grants from the EU’s stimulus fund months before the bloc starts paying – a move that could reduce the effectiveness of any offer of Brussels aimed at linking subsidies to structural reforms.

Valdis Dombrovskis, one of the EU’s executive vice-presidents, said this week that disbursements from the stimulus fund will be contingent on reaching “specific and measurable milestones” and that “a lot of work remains to be done. make”. Some Member States need to be more specific to define exactly which 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 demand for EU funds and proposals for investment and economic reform.

Mr Dombrovskis said that 11 member states have now presented the first drafts of these plans, which are guided by the country-specific recommendations previously made by the committee.

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