New insights from the Bank of Spain on pension reform and fiscal policy
The Bank of Spain notes that reforms to the Government Pension System alone will not clear the public accounts. It will require additional measures on the future side to address the rise in benefits driven by population aging. The central bank suggests adopting clearer auto-adjustment mechanisms beyond the currently discussed auto-tuning tools to keep the system balanced. An intergenerational equality mechanism was introduced by the government as spending measures may need to be negotiated and approved in 2032 or later.
This is just one of the observations highlighted in the bank’s annual report. The 300-page publication, released this week, underlines the great uncertainty facing the supervisory body. Beyond concerns about long-term fiscal sustainability and pension adequacy, the Ukraine war has contributed to a slower economic recovery, while inflation has weighed on households and businesses and affected overall activity. In presenting the report, Pablo Hernández de Cos, the Governor of the Bank of Spain, called for broad political and social consensus to guide policy responses. He stressed that the shocks from the Ukraine conflict and the pandemic, two extraordinary events, still require careful policy management and coordination. (Cited by Bank of Spain)
New projections in June
The level of uncertainty has prompted a revision in growth forecasts for the year. The economy was initially projected to grow around 5.1 percent, but the outlook was trimmed to about 4.5 percent in April, with a new projection to be released in June. This update, reported by the agency’s economics and statistics director, Angel Gurría, will indicate whether the new forecast aligns with the government’s previous estimate of 4.3 percent or if it leans closer to the 4.0 percent figure given by the European Commission. The downward adjustment largely reflects weaker first-quarter GDP growth, influenced by weaker reading in the national statistical institute data. (Cited by Bank of Spain)
The June outlook will also reassess inflation trajectories. Inflation had been estimated around 7 percent on average earlier in the year. The bank plans to incorporate innovations that connect broader inflation dynamics to more persistent price trends, particularly core inflation which excludes the most volatile energy and fresh food prices and had reached about 4.4 percent in April. There is concern that prices could settle at higher levels over time, and the bank aims to model the likely impact of measures such as easing the electricity bill following the government cap on gas prices. (Cited by Bank of Spain)
Wage settlements and benefits
There is broad agreement in projections from major institutions that inflation may subside toward a more moderate pace near two percent in 2023. Yet the governor stresses the importance of an income agreement where employers and workers share the burden of inflation that is amplified by international factors such as energy, food, and essential inputs. (Cited by Bank of Spain)
Negotiations under the State Collective Bargaining Agreement for 2022-2024 have not produced a new wage deal, according to the bank’s reading of the data. Yet signs point to a tacit understanding to support purchasing power. The Bank of Spain’s Business Activities Survey shows that, despite a 4.5 percent decline in margins in late 2021, companies may refrain from passing on all higher costs to prices. This suggests a gradual alignment between wages and costs, rather than a rapid pass-through. (Cited by Bank of Spain)
Managing pension increases
The bank argues that pension adjustments should help distribute inflation costs associated with the energy crisis. It recommends ensuring purchasing power for those on minimum pensions while cautioning that extending this protection to the entire pension system would require coordinated actions from other economic actors and possibly beneficiaries of capital income who would shoulder a larger share. At present, the government plans a pension increase of about 6 percent in 2023, aligned with the average inflation forecast for 2022. (Cited by Bank of Spain)
The preservation of purchasing power for pensions and the gradual removal of the sustainability factor reflect earlier reforms. These ongoing measures, originally introduced under previous administrations, include steps to raise the effective retirement age toward the legal age. The second phase of pension reform this year is expected to introduce additional actions, including the development of retirement savings plans, reviewing maximum contribution guidelines and cap levels, creating a new framework for self-employed workers, and reevaluating how the regulatory base pension is calculated. (Cited by Bank of Spain)
Beyond these reforms, the bank notes that future policy must address revenue side adjustments as well. Whether through higher contributions, increased benefits, or a combination of both, the goal remains to ensure the system’s long-term sustainability. Strengthening the link between contributions and benefits and guaranteeing adequate support for the most vulnerable households are central ideas, while a robust public discussion will be needed to define the appropriate level of benefits and the revenue strategy to fund them. (Cited by Bank of Spain)