Spain will raid its decade-old pension reserve fund to pay retirees their Christmas bonus after lifting the annual limit on how much it can take out of the vehicle that invests in sovereign debt.

The government will extract about 4 billion euros by year-end from the 67 billion-euro pool, suspending a 3 per cent annual limit on withdrawals, Labor Minister Fatima Banez told reporters today after the weekly Cabinet meeting. Separately, the government decided it won’t raise pensions to match inflation, she said.

The 26 per cent unemployment rate has pushed the welfare system into deficit sooner than expected, while Prime Minister Mariano Rajoy has sought to protect pensioners from budget cuts. The reserve fund, created a decade ago to guard against the effects of an aging population, invests mainly in Spanish government debt.

At the meeting, the government scrapped a law that forces it to compensate pensioners for higher-than-expected inflation. The Bank of Spain warned that would cost about 3 billion euros. Inflation was 2.9 per cent in November, the month that’s used a reference, compared with the 1 per cent provided in 2012 in line with the government’s inflation forecast.

To offset the lost spending power, pensioners on less than 1,000 euros per month will see their benefits rise 2 per cent next year, at a cost of 1.5 billion euros, Banez said. Other pensions will rise 1 per cent, in line with the 2013 budget.

The decision today was the third move to withdraw cash from the reserve this year. The 3 per cent limit on withdrawals will be lifted until 2015, Banez said.

Protecting pensioners

Rajoy pledged during his campaign last year to protect pensioners’ spending power and the decision to increase benefits this year was one of the first he made after coming to power. The pledge was one of the few campaign promises he has kept as the debt crisis has prompted him to cut jobless benefits, raise taxes, and reduce firing costs.

The reserve fund’s assets are equivalent to about 11 per cent of the central government’s estimated outstanding debt for this year. Its waning firepower comes as foreign investors’ share of Spanish debt has declined and the government needs to issue more than 200 billion euros of securities next year.

Before last year, the social-security reserve had grown every year since its inception. In 2005, with Spain running a budget surplus, the fund diversified into German, French and Dutch debt. Then in 2008, as borrowing costs started to rise, it went back into Spanish debt to prop up the market.

Spain has about 8 million retirees, who together receive about 7 billion euros per month, more than twice the 3.84 billion euros of expenditures in 2000. The ratio of workers per retiree paying into the system has fallen to 2.43, the lowest since 2003, according to ministry data. The crisis has axed 3 million people from the list of contributors, Banez said.

Bloomberg