Published on Monday, January 15, 2024

Spain | New risks in the wake of the pension reform

A few months ago, the OECD warned that the recent pension reform was unlikely to prove sufficient to fully balance the system. Rather, it said it would increase expenditure more than income, thereby requiring the government to take further steps.

Key points

  • Key points:
  • More recently, the European Commission unveiled the population and GDP forecasts that will be included in the full Ageing Report scheduled to be published this year. Based on these, in 2025 AIReF will assess whether additional measures must be taken to balance the system or, otherwise, to trigger the safeguard clause of the intergenerational equity mechanism and increase contributions even further.
  • The Commission is forecasting average GDP growth in the 2022-2050 period of 1.2%, below than the 2% forecast by Spain's Social Security, underpinned by more favorable demographic and macroeconomic assumptions than other institutions, which tend to underestimate the impact of the reform on the deficit.
  • Until the Commission discloses its calculations, FEDEA's forecasts point to growth in net expenditure on pensions (i.e. expenditure less the post-reform increase in income) equal to 1.5 percentage points of GDP between 2022 and 2050, and above 3.5 percentage points of GDP in 2050.
  • The additional funding requirements would arise in a system that is no longer self-sufficient. At the end of 2022 (i.e. the last full year for which data are available), the difference between contributory income and expenditure resulted in a deficit of 2% of GDP (as forecast for 2023 despite the sharp increase in contributions), not to mention another 2 percentage points for civil servants, non-contributory pensions and supplements to minimum pensions.
  • As BBVA Research highlighted in another report, growth of the public sector without increased efficiency and a higher share of social spending to the detriment of productive investment would have an adverse impact on per capita income and social welfare.

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