What does the rise in pensions mean for the coming years?

Find out how the rise in pensions may affect you in the coming years.
With the approval of the General State Budgets in 2018, a series of measures were agreed that will affect state pension values in the coming years. For the time being, the rise in pensions in 2018 and 2019 has been higher than what would have been the case with the current formula. But, what exactly does this increase involve? Below, we explain in detail the expected evolution of pensions in the near future.
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How have pensions evolved up to now?

Historically, the annual revaluation of pensions was linked to the consumer price index (CPI). This index was the determining factor for the annual calculation of pensions until the 2013 reform, which introduced the pension revaluation index (PRI). The PRI was intended to guarantee the sustainability of the pension system by linking the annual evolution of pensions to the health of Social Security accounts, limiting revaluation during a deficit (to avoid increasing it) and during a surplus (to save the excess). The floor was set at 0.25% and the ceiling at the CPI + 0.50%. Since its first application, in 2014, the PRI has limited the annual revaluation of pensions to the 0.25% floor. In fact, the Pension Revaluation Index (PRI) has yielded negative results and would thus suggest lowering pensions, although the 0.25% floor has guaranteed minimum growth.

What will be the rise in pensions starting in 2018?

Although the pension increase in 2018 was initially set at 0.25%, the approval of the General Budgets saw the return of the CPI as the base for calculating the revaluation of pensions. It also meant delaying the implementation of the Sustainability Factor, the second element of the pension reform of 2013, until no later than January 1, 2023.

Thus, the increase agreed for state pensions in 2018 was 1.6%, which was also applied for 2019. The result of this improvement is a rise in the average pension of about 17 euros per month, while retirement pensions themselves sit at an average value of about 1,100 euros per month.

The increase is even greater for minimum and non-contributory pensions. In this case, the percentage is 3% for both 2018 and 2019. These changes also affect the regulatory base for certain widowhood pensions for beneficiaries aged 65 or over, which increased from 54% to 56% in 2018 and from 56% to 60% in 2019

What will be the evolution of pensions after 2019?

The current question is what will happen with the revaluation of pensions in 2020 and in subsequent years. Everything seems to indicate that the PRI will be permanently fixed. The question to be resolved is whether the revaluation using CPI is here to stay, something that bodies such as the Independent Authority for Spanish Fiscal Responsibility (AIReF) warn against, given that it can trigger a Social Security deficit. Otherwise, a formula that takes the CPI as a reference but incorporates a corrective factor could be applied.

It is important to bear in mind that this dilemma regarding the revaluation of pensions coincides with the delay in implementing the Sustainability Factor, created to link the value of pensions to life expectancy. The underlying logic of this scheme is that those who retire with a longer life expectancy should receive a smaller monthly pension, as it is presumed that they will receive it for longer. This is intended to maintain intergenerational equity of pensions.

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The PRI and the Sustainability Factor are two parameters that were introduced in the pension reform of 2013 in order to ensure its medium and long-term viability. With both reforms suspended, it remains to be seen how and in what way they are to be implemented again, if at all, or what new reforms are proposed to deal with the Social Security deficit.

Without a doubt, pensions pose a great challenge for society. For this reason, at BBVA, we offer you alternatives so that you can have additional income during retirement. Use our pension simulator to calculate the amount you will receive as a pension and obtain a personalized recommendation with the best options for maintaining your purchasing power after retirement.

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