The Pension Reform

In the draft pension reform released last week, the Ministry of Employment estimated savings of 33.000 million in nine years.

To arrive at such an estimate, Social Security assumes that annual inflation will be only 1% in that period.

With tighter parameters bill rises sharply. With inflation at 2%, used by the European Central Bank across the euro zone, the cut between 2014 and 2022 would be about 70.000 million euros.

If we substitute the 1%, by the 3% average CPI in Spain since the start of the euro zone, the reduction would be about 110.000 million euros.

CPI (%) ≈ Saving 2014-2022 (€)

1,0 33.000 million

2,0 70.000 million

3,0 110.000 million

The average benefit for a retiree, according to the August 28, 2013 is € 13.746,88 per year, divided into 14 payments of € 981,92 per month.

With the government estimate (1% inflation), the 2019 pension will be 638 euros less annually than it would be if reform does not apply.

If inflation in the next six years be placed at 2% per year, the accumulated depreciation in the same period would be 109 euros a month, about 1527 euros in the year.

With the 3% inflation, pensioners lost reach 2460 euros, more than 175 in each pay.

CPI

(%) Monthly loss

(€) Annual loss

(14 payments) (€)

3,0 175,72 2.460,12

2,5 141,98 1.987,79

2,0 109,06 1.526,84

1,5 76,93 1.077,06

1,0 45,59 638,21

This year is very likely that inflation will hover around 1%, but will result from a combination of factors very difficult to repeat (highest unemployment rate, weak economic activity, and higher taxes such as VAT). In fact, in the last 14 years, only in November 2009 (the year of the Great Recession), the Spaniards CPI was below 1%.

Not even in the euro zone, typically less inflationary than Spain, that 1% is common. The average in November since 1999 stands at 2,1%.

Performing the appropriate calculations, the loss of purchasing power that anticipates the government until 2019 with the implementation of its reform require between 18 years (with an inflation rate of 1% until 2022) and 71 years (if the CPI is 3%) consecutive revenue surplus in the pension system.

Therefore, pensioners will lose purchasing power this decade.

Monthly Annual

Current

(€) CPI

(%) Reformed(€) Current

(€) CPI

(%) Reformed

(€)

981,92 1,0 936,33 13746,88 1,0 13108,62

981,92 2,0 872,86 13746,88 2,0 12220,04

981,92 3,0 806,20 13746,88 3,0 11286,80

CPI: Consumer Price Index. This index indicates "how is the price of life".

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