Moody’s calls for more adjustments in pensions so as not to lower Spain’s rating

The debate on the pension system is not closed even a few months after the Government completed the reform that aims to guarantee its sustainability for the coming decades. A counter-reform is necessary. At least this is what the American rating agency Moody’s maintains, which joins other organizations such as the Independent Fiscal Authority (Airef) or the Bank of Spain that think that the country has not yet done its homework in this matter.

And he gives a clear warning to the authorities: either the Executive carries out more adjustments to the system – which will, therefore, imply new cuts – or the deficit will inevitably skyrocket to 3.2% in 2040 and this will significantly affect the negative to Spain’s credit rating, currently located at ‘Baa1’ with a stable outlook, which would make debt issues more expensive and, therefore, complicate their financing.

Moody’s estimates, in a report published this Wednesday, that if additional measures are not carried out to those established in the recent reform, which exponentially increases the system’s expenses by linking by law the increase in pensions with the CPI, the deficit of Social Security will increase to 1.4% by 2030 and up to 3.2% by 2040, compared to 0.5% in 2022.

The reform designed by the Minister of Social Security, José Luis Escrivá, has clung to the path of obtaining more income mainly with a triple increase in contributions: for all workers through the intergenerational equity mechanism (MEI) that seeks to fill the pension piggy bank to pay baby boom pensions; the 30% increase in the maximum bases, and the so-called ‘solidarity rate’ for the highest incomes.

Thanks to all the measures contemplated in the Escrivá reform, income will grow around 1% of GDP at its peak –according to Moody’s estimates–, which shows that this is an insufficient increase to balance the system, in red numbers for years.

In addition, the firm warns that “income could be lower if the new measures have undesirable economic effects”, since “some estimates suggest that they will cause a permanent loss of employment of more than 100,000 jobs”, something “especially relevant for a country like Spain, where the unemployment rate is still around 12% despite the improvements of the last decade.

Very rapid aging

It should be noted that the Government’s latest reform has practically no measures to contain spending, beyond the penalty for early retirement and the slow and progressive extension of the years of contributions that are taken into account to calculate the pension. On the contrary, the legal increase in pensions with the CPI will mean a heavy financial outlay – more so due to the current rise in prices – that will further strain the system, to which we must add the strong aging of the Spanish population, « at one of the fastest rates in Europe.

And it is this line, that of savings, that the credit agency is betting on “given the magnitude of the projected deficit.” More specifically, he considers it advisable to carry out “structural reforms that increase the employment rate or potential real GDP.” For example, he calculates that if potential real GDP increased to 2% in 2023-2060, 0.5 points of the Social Security deficit would be saved in 2030; 1.4 points in 2040 and 2.3 points in 2050.

But if no new measures are taken, Moody’s estimates that Social Security expenditures will increase from 13.5% in 2022 to around 15% of GDP at the end of this decade and up to 16.8% in 2040.

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