The Spanish Government announced in November 2012 that it did not plan to increase pensions in line with inflation. Since the General Social Security Law stipulates that pensions must be updated every year to match inflation, this forced the government to enact a new Royal Decree to temporarily modify the indexation mechanisms of the pension system. Unions opposed the measure and organised protests and opposition parties took the proposal to the Constitutional Court.
Background
One of the main priorities of the Spanish Government has been to reduce its fiscal deficit to meet the goals agreed with the European institutions. As a result, during its first year in government the Popular Party renounced some of its flagship electoral commitments including its promise to increase pensions in line with annual inflation, as established by law.
In a newspaper article (in Spanish) in November 2012, the government reaffirmed its commitment to comply with the General Social Security Law which regulates pension increases in line with inflation. Doubts, however, were raised about the viability of this course of action. Most estimates predicted that keeping the promise would increase the public budget by between €3,000 and €5,000 million – figures which would seriously challenge the deficit reduction goals.
When the annual inflation rate of 2.9% was released in November 2.9% by the National Statistics Institute (INE), the government estimated that increasing pensions in line with inflation would cost €3,800 million and announced it would not allow the full increase.
Pensions pay increase approved
As the General Social Security Law establishes that pensions must be updated every year according to the annual inflation growth, the government had to enact a Royal Decree to temporally suspend it. The Royal Decree 28/2012 of 28 November 2012 stated that during 2012, pensions would not be increased as prescribed by the General Social Security Law. To compensate, the government agreed a 1% pension increase for 2013, rising to 2% for those with a pension lower than €1,000.
Opposition to the measure
Unions were strongly critical of the measure and called for demonstrations in 55 cities on 17 December 2012, protesting that pensioners will lose 1.9% of the purchasing power they should have had, and pointing out that any increases for 2013 will not make up for losses in 2012. In parliament, the measure was rejected by all the political parties and was passed only with the votes of the Popular Party.
Spain’s Socialist Party joined other parties to challenge the legality of the measure by asking the Constitutional Court to rule on it.
Commentary
The decision not to increase pensions in line with the annual inflation rate illustrates how the crisis is challenging the sustainability of the pension system.
The government announced it would open a new debate on pension reform – even though the last reform enacted by the Socialist government (ES1102031I) had not yet been fully applied. The main topics to be discussed are likely to be early retirement programmes and partial retirement programmes.
However, the current state of the relationship between the unions and the government and between the political parties in opposition and the government do not make for an easy debate. Bearing this in mind, great efforts will have to be made to generate consensus on this most sensitive political issue.
Pablo Sanz de Miguel. CIREM Foundation