A higher productivity growth rate in the economy – which is one of our main economic policy challenges – has a stabilising impact on pension spending as a proportion of GDP, precisely through a reduction in the replacement rate, insofar as existing pensions are indexed below productivity growth. The sustainability factor, which will come into force in 2019, and the new pension revaluation index, introduced in the 2013 reform, also temper spending by reducing the replacement rate. In practice, the new pension revaluation method, in force since 2014, sets the annual growth of pensions according to past and future behaviour of revenue and expenditure in the system, which depends on factors such as the number of pensioners and average pensions, with ceilings and floors equal to the change in the CPI+0.50% and 0.25%, respectively. On the projections available, in macroeconomic scenarios that are fairly favourable in terms of employment and productivity developments, and in which inflation stands at close to 2%, the recent reforms (i.e. putting back the retirement age, a sustainability factor and a new revaluation mechanism) would manage to counter the effect of the expected increase in the dependency ratio on pension spending and, therefore, would succeed in restoring the system’s financial sustainability in the long term. Assuming no new revenue sources, the adjustment mechanism would operate through reductions in the replacement rate, which would need to be significant to stabilise the system’s spending.

For example, the elimination of ceilings on the contribution base would significantly raise revenues, but it would also mean a substantial increase in labour costs, and if there is no parallel increase in maximum pensions the relationship between contributions and benefits which, in my opinion, should be preserved, would be considerably weakened. Another option would be to confine the concept of contributory pensions exclusively to retirement pensions, which would continue to be funded from social contributions, while other pensions would be funded from general taxes. Clearly, this would require increasing general taxes, or reducing other public expenditure in order to be able to pay for the pensions transferred from the social security fund to central government. As regards raising general taxes to pay for pensions, it is crucial that the resulting tax basket has the mildest possible distortionary effects on growth, bearing in mind the point of departure. 5/6  To conclude, I would like to share three considerations with you. Firstly, I would like to highlight that the recent reforms have built in an automatic mechanism for the financial equilibrium of the pension system (sustainability factor and revaluation index), bringing it closer to other European public pension systems. This automatic mechanism, as it is currently defined or under alternative definitions in the future, should be preserved. Secondly, current regulations or any additional reforms should be implemented as transparently as possible in order to give the public the necessary information about the sufficiency of future pensions and allow individuals to make optimal saving decisions.