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Spanish Government Will Spend 5000 Million Only In Pension Increases Of 2022

The perfect inflationary storm will make the Government have to extend a disbursement of about 5,000 million euros in concept of higher payments for next year.

Specifically, at the beginning of next year the ordinary revaluation of pensions and, for the month of February, the expected compensation that the group will receive for the deviation experienced between the advance in prices of 2021 and the rise made at the beginning of this year exercise, which is already assumed, must be paid when it is below inflation.

In this sense, the specific amount of this disbursement will not be known until almost the end of this year, since it will depend on the behavior of the CPI in the coming months. And another determining factor , no less, will be the decision adopted by the Ministry of Social Security on whether to calculate the compensation for February , known as paguilla, with the average CPI of 2021 or only with the reference for the month of November, which is the mechanics commonly used by Social Security.

With the exception, of course, of the provisions of the royal decree of revaluation of 2021, which included this possibility of paying a payment to retirees last February, if there had been a negative lag between the rise of the year 2020 of 0 , 9% and the evolution of prices last year, which closed with an inflation of -1%,eliminating any need for compensation , since the group gained de facto 1.9 percentage points of purchasing power.

In case of having had to pay said compensation, the royal decree of revaluation approved in the Council of Ministers included, since in addition to the revaluation “it enshrines a guarantee of maintenance of purchasing power during the year 2020 in case the average value of the increases year-on-year percentage of the CPI for the months of December 2019 to November 2020 is higher than 0.9% “.

In other words, if pensioners were to have been compensated in 2021, it would have been done with the average CPI for the twelve months mentioned.

Now, transferring this mechanism to the current situation and facing the revaluation of 2022, we have, on the one hand, the inflation forecast for 2021 as a whole, which will be the measure for the ordinary revaluation under the agreement for the pension reform that It sets the average CPI for the previous year as a bar, which according to Funcas’ forecast will be 2.5% .

Here, according to Fedea’s reference, which estimates that every 2 points of rise for pensions, spending increases by 2,500 million euros, so the expected revaluation would reach 3,000 million euros in the whole of next year.

In addition, if the rise in 2021 was 0.9%, similar to that of last year, and the CPI of the previous twelve months is finally taken as a reference for the compensatory pay, the deviation expected at the end of the year would be 1 , 6% and the cost of that subscription for the month of February would amount to 2,000 million euros.

In sum, the two increases would cost the Social Security coffers about 5,000 million euros. That would be added, further, to the already mammoth annual pension bill that this year commits more than 163,000 million euros of the Budget.

No model confirmation
This would eventually be the financial scenario that would take place assuming, on the one hand, the CPI forecasts for the year as a whole and, on the other, with a compensatory pay calculated based on the average of the previous twelve months.

However, official sources have not yet confirmed what the bar for this compensation will be, since historically, it has not been made based on that average but taking the reference for the month of November, compared to the increase made at the beginning of the year. In this case, the scenario would worsen for Social Security in terms of the cost of the pay and, therefore, of the benefit revaluation mix planned for the beginning of 2022.

Here, returning to Funcas’ forecasts, the agency estimates that the CPI for the month of November 2021 will amount to 3.8%. This would imply for that February payroll having to deal with a compensation of 2.9 percentage points, which would raise its cost to 3,600 million euros and would bring the total outlay for revaluations to 6,600 million. In other words, the equivalent of just over half a point of GDP.

The last compensation
With all this, this financial rally faced by Social Security at the beginning of 2022 will not happen again. The first leg of the pension reform recently agreed within the social dialogue table includes in one of its fundamental points for the guarantee of conservation of the purchasing power of pensioners and retirees that the annual revaluation of payments is carried out in accordance with the inflation advance.

However, a modification in the mechanism for the rise will put an end to the pay next year .

The new revaluation mechanism will eliminate this factor of uncertainty as to whether the evolution of inflation is as expected, or deviations occur that must be compensated a posteriori. Thus, for the rise in January 2022, the new law would already be in force according to the times that the Executive manages to approve the bill that will start the parliamentary procedures in September to see the light, predictably, before the end of this year .

From that moment, the annual revaluation of pensions will no longer be based on the CPI forecast for that year, but will be carried out based on the average CPI of the previous year.

Therefore, it will not be necessary to compensate for these deviations in the forecast, since the increase will be based on the price increase registered in the previous months and not based on the estimation of the following months, subject to the uncertainty of a Indicator that has shown a high level of volatility in the face of eventual economic shocks , as has been demonstrated in 2020 and 2021 due to the impact of the pandemic.

Although one element that does underlie this new revaluation system is that there will be periods of the year in which there may be gains or losses in purchasing power , although a posteriori, all these differences are equalized in the rise of the following year.

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