Spain inches ahead with pension reform

Spain will pay workers to postpone retirement as part of a pensions reform strategy that analysts warn does not go far enough to cut a huge deficit in the system.

Spain inches ahead with pension reform
The Spanish national flag flutters in the air near a statue of the Euro logo outside the European Commission building in Brussels. Kenzo TRIBOUILLARD / AFP

With nearly 30 billion euros ($36 billion) of annual losses in 2020 and rising, Spain’s social security budget is one of the biggest contributors to the country’s ballooning public deficit.

The European Commission has long demanded that Spain reform its pension system and has made it a condition for accessing European Union economic recovery funds.

Under a planned reform unveiled earlier this month that aims to get more people to work longer, Spain will give cheques worth up to 12,000 euros ($14,000) per year to retirement-age workers who postpone their retirement.

Retiring early on the other hand would lead to a reduction in monthly payments.

But the reform, which must still be approved by Spain’s fragmented parliament, will also restore the indexation of pensions to inflation.

“Pensioners will no longer have to worry about the evolution of their pension,” socialist Budget Minister Maria Jesus Montero told a news conference last week after the cabinet approved the reform.

A conservative government eliminated indexation in 2013, although in 2018 it hiked pensions in line with inflation following protests by pensioners against their loss of purchasing power.

The 2013 reform also gradually increased the legal retirement age to reach 67 in 2027 from around 65 years currently.

‘Not sustainable’ 
Rafael Pampillon, head of the economics department at Madrid’s IE Business School, said that raising pensions in line with inflation every year was

“The system is not sustainable. Pensions should be frozen,” he told AFP.

Demographics complicate the picture.

Spain has one of the world’s longest life expectancies — around 83 years according to the World Health Organisation — and Europe’s lowest fertility rate after Malta’s.

As a result, the number of youths under the age of 25 who enter the labour market each year is 30 percent less than those over 40, said Pampillon.

Javier Diaz Gimenez, an economics professor at the IESE Business School, said that while other southern European nations like Italy and Greece face the same problem, “in Spain reform has been put off, the consensus has been to deny the problem.”

“People live longer, therefore they cost more, therefore their pensions should be lowered. That is hard because it means not keeping a promise to people who are about to retire” and who expect a certain sum after paying into the system for years, he added.

‘Up in the air’
The government has said that details of the planned pension reform will be ironed out in the autumn.

It will have to adjust payments based on available funds and extended life expectancy.

Social Security Minister Jose Luis Escriva recently sparked an uproar by suggesting that baby boomers — those born in the post-WWII baby boom between 1946 and 1964 — would eventually have to accept lower pensions, and quickly backtracked.

With a general election expected in two years, no party wants to risk alienating the large block of older voters by proposing pension cuts, said Pampillon of the IE Business School.

“Everything is up in the air,” he added.

Jordi Fabregat of the Esade business school said part of the problem is that Spain offers generous public pensions, with monthly payments amounting to 80 percent of a worker’s final salary compared with an average of 55 percent for all of Europe.

“There is not the habit in Spain of saving for retirement,” he added.

The only chance for a deep, sustainable reform of the pension system is if “there is pressure from the European Union,” said Fabregat.

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How much can I save on my Spanish electricity bill now that VAT has been cut?

With welcome news that Spain will cut VAT on electricity from 10 percent to five percent to shield consumers from soaring inflation, how much can you expect to actually save?

How much can I save on my Spanish electricity bill now that VAT has been cut?

On Wednesday June 22nd Spanish Prime Minister Pedro Sánchez announced a further reduction in VAT on electricity prices.

Speaking to the Spanish parliament, Sánchez explained that the VAT reduction, from 10 percent to five percent, would be approved at a cabinet meeting this weekend.

But this isn’t the first time that the Spanish government has taken direct action to tackle skyrocketing electricity prices.

Last year it also slashed the VAT rate on electricity 21 percent to 10 percent to try and soften impact of rising electricity price rises on consumers facing price increases across the board.

Facing criticism for his government’s record on helping consumers, Sánchez blamed “a war at the gates of Europe” for the rises, and said the latest cut will form part of a package of measures to try and stem the effects of inflation, which hit a staggering 8.7 percent in May, the highest level in Spain for decades.

READ MORE: Spain to cut electricity tax by half to ease inflation pain

But how much can you actually expect to save on your electricity bill following the news?

How much will I save?

While a cut to the VAT rate paid on electricity is welcome, in reality it seems the difference to electricity bills will be minimal.

According to experts, lowering VAT from 10 to 5 percent will mean savings of around €4 a month for households with an average consumption (270 kWH per month and a contracted power of 4 kW) on the regulated market.

Let’s look at an example. A household with consumption at 270 kWH per month would have paid €95.43 in the last 31 days. If VAT had been applied at 5 percent, as it will be under the government’s proposed cut, their monthly bill would have worked out €4.30 cheaper.

For comparison, if the government had not stepped in at all and no tax reductions of any kind had been applied, that same receipt would have been €109.6. 

How much will it cost the government?

Cutting VAT, although welcome and much needed by most consumers at the moment, does come at a cost. Officials from the Hacienda believe that lowering VAT to 5 percent will cost the public coffers up to €460 million in the next three months alone. 

Hacienda estimates that the government has so far spent €3.8 billion on all tax cuts to lower electricity bills.

Is it enough?

Is another VAT cut enough to recoup the difference and negate rising prices? Simply put, if wholesale electricity prices (something the Spanish government has no control over) continue to rise at the rate they have been, the prices passed onto the consumer will most likely make the cuts to VAT negligible.

At the start of June, the daily price of electricity began at €210/Mwh, but by this week this Thursday it had already climbed to €272/mWH – a 29.5 percent spike since the beginning of the month equivalent to €62 extra on bills.

With no end to war in Ukraine or the volatility on the energy market in sight, the Spanish government is searching for ways to ease the burden on consumers. Labour Minister Yolanda Díaz recently proposed slashing the price of monthly public transit passes by 50 percent and offering €300 to people hit hardest by rising prices.

READ MORE: Spain eyes €300 handouts for most vulnerable and further fuel reductions