Spain is considering freezing pensions and speeding up a planned rise in the retirement age as it races to cut spending and meet conditions of an expected international sovereign aid package, sources with knowledge of the matter said.
The pension measures would save at least 4 billion euros (US$5.2 billion) a year as well as fulfill EU policy recommendations issued in May which senior eurozone sources said were being used as a blueprint for the terms of a sovereign aid program.
The accelerated raising of the retirement age to 67 from 65, currently scheduled to take place over 15 years, is a done deal, the sources said. The elimination of an inflation-linked annual pension hike is still being considered.
Spain is hesitating to apply for external aid to handle a high public deficit and soaring debt. Its borrowing costs fell on Thursday at an auction of a 10-year benchmark bond, but relief may be short-lived.
The new pensions steps, which could be announced as soon as next week along with the budget for next year, would send a strong signal to investors that Spain is serious about implementing structural reforms it has delayed because of the political cost.
Prime Minister Mariano Rajoy, who was forced earlier this year to break campaign pledges such as not raising taxes, has repeatedly said he would not touch pensions, but he has few options left to trim the budget after drastic cost cuts.
He toned down his language last week and said it would be “the last thing” he would do.
Sources with knowledge of the government’s thinking said Rajoy’s comments were a sign that his stance was shifting.
“He just said that he would not cut the pensions, but did you hear anything else? We both know that there are several ways of cutting. One is to simply leave them steady against inflation,” one of the sources said.
Many economists also believe a freeze is inevitable.
The budget for this year earmarks a rise in pension spending of 3.2 percent, including a 1 percent inflation-linked review, but inflation is running close to 3 percent, meaning an extra 4 billion euros would be paid to pensioners in January, next year but booked to this year’s budget.
So canceling this year’s inflation-linked raise would save the government between 5 billion and 6 billion euros.
For following years, based on annual inflation of 2 percent, the reference used by the European Central Bank to set its main rates, the adjustment would cost 4 billion euros.
“There is no way around it. You have to cut the link with inflation and freeze the pensions next year,” said Jose Carlos Diez, chief economist at Intermoney brokerage in Madrid.
Both removing the inflation adjustment and accelerating the retirement age increase are long-standing EU demands and any bond-buying program to help Spain finance its debt would insist on this, senior euro zone sources said.
Countries which were previously rescued, such as Greece, Ireland and Portugal all had to pass steep cuts on pensions.
In Greece, the cuts ranged from 20 percent to 40 percent, while new pensioners had a 10 percent pay cut in Ireland and Portugal scrapped the Christmas and summer extra payments.
The timing of any request for European aid is in Rajoy’s hands. Some pointers suggest he could make the move along with the budget package to pre-empt a credit review by ratings agency Moody’s, due by the end of this month, which might otherwise downgrade Spanish debt to junk status. Moody’s has said it would welcome a Spanish aid request.