Saturday, December 4

Two euros less in salary compared to 300 euros of cut in retirement: this is the pension equity mechanism

They have complex names and very different effects. The coalition government agreed yesterday with the unions, and without the employers, the ‘intergenerational equity mechanism’ of pensions that will replace the ‘sustainability factor’ of the unilateral reform of the Government of Mariano Rajoy of 2013. The first increases income Social Security through an increase in the contribution of companies and workers during the next decade. The second would cut future pensions, by linking their amount to the increase in life expectancy. The effect of both measures is, in any case, very different. The equity mechanism means for a worker with an average salary two euros less in his monthly salary for a decade, while the sustainability factor would cause strong cuts in the pension, of up to more than 20% and an amount of “about 300 euros” in the case of the youngest.

The additional contribution agreed by the Government and the unions in the equity mechanism is 0.6 percentage points more between the years 2023 and 2032. It seeks to gather a “cushion” of income for the retirement of the baby boomers, a very large generation followed by others of less extensive workers. The funds will accumulate in the so-called ‘pension money box’, the Reserve Fund.

How much is this additional contribution in euros? On average, about two euros a month less for the worker and ten euros for the company, as shown in the following table. It also reflects two other scenarios, for a worker who earns the minimum wage and for another with a high wage who contributes at the maximum base.

Cutbacks of more than 300 euros per month

On the other hand, when it comes to reducing pensions as a result of the sustainability factor, the cut is much higher in most of the cases. The Minister of Social Security, José Luis Escrivá, has stressed these days that the reduction of the factor of the Rajoy era could translate into “about 300 euros” less per month in the future pension.

From the Social Security they explain this example. This would be the case of a person with an average contribution base, who would find a pension of “1,612 euros per month” (with a “theoretical” replacement rate of 83%). According to the estimates of the Ministry, if this person is 18 years old today, the future cut in the pension due to the sustainability factor would be “19.4%”. That is, 313 euros per month less in your future initial pension.

Another example that they contribute to Social Security: for a person who is 28 years old today, the cut would be “16.6%”, they calculate. That is, a loss of 268 euros per month.

Workers’ Commissions has released its own estimate of cuts in the factor approved in the 2013 pension reform, based on life expectancy data from the INE. In their case, they calculate that the decrease in the pension would be even greater, 23% for those people who are now 18 years old.

The union has considered “in all cases the first possible ordinary retirement date at 65 years,” they specify in CCOO. It must be said that translating the effects of specific elements of pension legislation into figures is not always straightforward. The calculation of the pension is influenced by a multitude of variables, which makes it difficult to marginalize only some. Thus, those offered are in any case approximations.

The difference between both tools is not only remarkable if you look at what it means in the monthly payroll / pension. The gap is even greater when taking into account that the additional contribution is proposed for ten years (2023-2032) and that the sustainability factor was definitive. That is, it established the cut in the initial amount of the pension that the future retiree would collect until his death, a period of time that in most cases exceeds ten years.

Is there intergenerational equity?

The new mechanism has two surnames, “intergenerational equity”, but they are disputed. It is assumed that seek to distribute the effort of adjustment to pay the pensions of the baby boom (increased income) between different generations. In the Government and the unions they emphasize that the agreed measure advances in this sense in the face of what caused the “sustainability factor”, something that its defenders deny, such as the PP and some economists who participated in its elaboration.

The sustainability factor would produce a decrease in the increasing pension over the years, in which life expectancy is expected to lengthen. Their logic was as follows: if the person is going to live (and collect the pension) more years, they should collect a lower pension.

At the beginning of its deployment – which was expected by 2023 if it had not been repealed – the sustainability factor would mean a cut in the pension of around 2%, according to the calculations of the Ministry of Social Security and CCOO. For the youngest, this would be close to 20%. Therefore, the sustainability factor burdens the adjustment (reduction of pension spending) in the younger generations.

If it goes ahead in Parliament as agreed, the intergenerational equity mechanism will apply to workers of all ages for the next decade. In addition to supposing a lower monetary reduction for the people affected by the measure, Minister Escrivá and the unions share that it is more “balanced”, as it affects a young employee as much as another in the middle or at the end of their professional career.

Employers disagree, considering, among other issues, that the measure will be “insufficient” and will require further adjustments in the future. The Minister of Social Security has trusted this Tuesday that the money collected, expects that some “50,000 million euros” will be a sufficient amount. If in the end these funds are not necessary, some repayment measures are contemplated. If the money falls short in the face of a spending deviation in the future, the mechanism contemplates that the government of the day negotiates with the social agents and the Toledo Pact more measures.

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