A report from the Comité de Expertos on Spain's public pension system reforms proposes a first-time change that will affect new retiree pension amounts significantly. A clause in the reforms could read that pension checks for current retirees will not drop below their base value so that these citizens don't end up with less money than they do now. Applying the clause will depend on whether politicians are willing to implement the policy. If they do, the Social Security Reserve Fund will be used to help pay for pensions.
Even though current retirees will not see their social security checks drop in value, workers who start drawing social security will earn smaller amounts becuase the reforms are attempting to make the entire system more sustainable. Surely, if sweeping changes are not carried out -- like Switzerland did several years ago -- the current system will not survive. The key task is to make sure that the system's revenues (from worker contributions) are greater than the amount of money it has to distribute to retired workers. To realice this goal, the Comité de Expertos has created a sustainability factor.
The European Commission is very likely to look favorably on the proposal once it gains approval from the Prime Minister and Congress. Although it is important for the CCOO, the country's biggest trade union, to back the reform, the Pacto de Toledo will increase complications for passing the reform. When 2011 pension system reform was approved, the sustianability factor for 2027 was forecasted and tied to life expectancy.
As the reforms get under way, there will be changes to the technique used to recalculate pension amounts each year. This changes could go into effect as soon as 2014 and is designed to neutralize the volatile effects of the business cycle by unlinking pension amounts from the Consumer Price Index. If the government wants to stick the current model instead, it should explain why it thinks lowering pensions will work out long-term and inform future retirees that they need to prepare for lower-than-expected retirement checks.
