Published on Monday, February 7, 2022

Spain | Pension sustainability and purchasing power

The pension system is a form of insurance whereby workers defer their income so as to maintain purchasing power and welfare throughout their life. Pay-as-you-go systems should therefore aim to revalue pensions in line with inflation, but with a design that ensures the system is sustainable over time.

Key points

  • Key points:
  • To safeguard this principle over the long term, the pensions to which retirees are entitled must ensure the actuarial balance and future sustainability of the system. This requires taking into account demographic and economic forecasts.
  • However, the Spanish system provides pensions that, in present value, are higher than the amount contributed during the working career (by 50-60% on average, according to the Spanish Institute of Actuaries, or by 74%, according to the Bank of Spain).
  • If revaluation is pegged to inflation, pension spending will rise by 2.3 percentage points of GDP by 2050, according to estimates by the Independent Authority for Fiscal Responsibility.
  • Unless steps are taken, this higher spending will increase the existing deficit of the contributory system, which in annual terms was 2.4% of GDP in the third quarter of 2021, despite the strong performance of social security contributions.
  • Assuring the self-sufficiency of the system with pensions that are revalued in line with inflation, but also with automatic adjustment mechanisms and equivalent offsetting measures in terms of expenditure, would help to avoid a dynamic of unsustainable debt, protect future pensions, reinforce certainty and reduce the future cost of funding the Spanish economy.

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