Spain’s Pensions Taskforce Urges Payout Cuts

Spain’s pensions taskforce, set up in April by Prime Minister Mariano Rajoy, said the government should be ready to cut benefits to protect the stability of the taxpayer-funded retirement system.

The proposal of the taskforce was published by the Labor Ministry today. It will be sent to a cross-party parliamentary committee and serve as a basis for discussion by lawmakers. Rajoy has pledged to change the law by the end of the year even if he can’t muster support from his political opponents.

Rajoy last week said contributions aren’t high enough to pay a rising number of pensioners, a situation that last year led him to tap the nation’s pension reserve fund for the first time. The European Commission has given Spain until 2016 to tackle the largest budget deficit in the European Union.

“First we must pay pensioners and secondly we must make the system stronger in the future and that’s why we need to talk about its sustainability,” Rajoy told lawmakers in Madrid on June 4.

The taskforce recommends two new formulas to adjust pensioners’ monthly payouts, both of which may be applied as soon as 2014. Labor Ministry data show pensions paid in May amounted to 7.73 billion euros ($10.2 billion), compared with a monthly average of 5.66 billion euros in 2007, before the start of a six-year slump in the euro area’s fourth-largest economy. Over the same period, the number of pensions paid increased to 9.04 million from 8.33 million.

Inflation Link

Today’s report was endorsed by 10 of the 12 experts appointed by the government to sit on the taskforce.

The first formula aims to ensure equality between generations and would adjust benefits for the life expectancy of retirees. The second would sever the link with inflation and update payouts so as to ensure the long-term stability of the system. That may mean reducing benefits, Rafael Domenech, an economist at Banco Bilbao Vizcaya Argentaria SA who sat on the taskforce, said at a press conference in Madrid today.

Domenech said the government should preserve the nominal value of existing benefits.

The Bank of Spain last month recommended bringing forward an increase in the legal retirement age by two years to 67, currently planned for 2027, and extending the career period taken into account to calculate pensions. The “sustainability factor” is among the key additional budget measures the government must take to secure the country’s credibility gains, Governor Luis Maria Linde said on May 31.

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