Pensions linked to inflation

In mid-April 2018, the government and the PNV agreed to raise pensions in line with inflation (the CPI) in 2018 and 2019, in exchange for the nationalist party’s support for the budget. The deal came after months of protests by pensioners, who demanded that their income should not lose purchasing power, and it placed the debate on pensions at the centre of economic policy. It was also an example of how economic decisions are negotiated in a parliament where no party has a sufficient majority.

The news was of interest to the many people who depend on pensions, directly or indirectly, but also to those who are still working and wonder what they will receive in future. For families, the discussion about the public pension system is an invitation to consider how their own retirement, and that of parents or grandparents, will be financed. These are conversations that many families put off and that become easier when tackled early and with figures.

What linking to inflation means

The CPI measures the change in consumer prices. If pensions are updated according to the CPI, they keep their purchasing power when prices rise. The measure responded to the protests by pensioners, who were demanding precisely that their income should not lose value.

Without an update of this kind, a fixed pension loses buying power over the years even though the nominal figure does not change. A small rise, below inflation, amounts in practice to a loss. That is why the updating rule matters as much as the initial amount: it determines whether the pension keeps pace with the cost of living or gradually falls behind. For a pensioner on a tight income, the difference between the two shows up in the shopping basket, the electricity bill and health costs.

A deal with a political price

The agreement was tied to the PNV’s support for the budget, which illustrates how economic decisions are negotiated in a fragmented parliament. The measures were fixed for two specific years, not as a permanent commitment.

That time limit has consequences. Anyone planning their retirement cannot take it for granted that the rule will continue beyond 2019: it will depend on future budgets and on the majorities that form. It is one more reason not to build a retirement plan on a single political hypothesis, and to look cautiously at any promise that is not backed by a stable rule. The prudent approach is to count on the public pension as a base and not as the only guarantee.

Planning for retirement

For families, the debate on pensions is a reminder that the public system is a part, not the whole, of retirement planning. Calculating what pension can be expected and how much supplementary saving is needed, and reviewing the plan from time to time, gives more security than depending on what is decided each year. The key is to start early, because time is the cheapest ally of saving.

A practical first step is to estimate the expenses one will have on retiring, subtract the expected public pension and see what difference remains to be covered with savings, assets or one’s own income. The sooner this calculation is made, the more room there is to adjust it. An adviser can help do it prudently, without relying on optimistic assumptions and reviewing it when the family’s circumstances change. It is also the moment to consider what would happen if a family member needed care, an expense that is often underestimated.

A calm retirement is built with time, with figures and without depending on a single source of income.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.