Spain’s pension system is facing increasing pressure as a result of its aging population and high public debt. The country’s current retirement age has been 65 for decades and so it must find alternative solutions to fix its creaking pension system, while being fair to both the young and the old.
The government’s recent pension reforms aim to achieve a fairer and more sustainable pension system that meets the needs of all generations. However, these reforms are also controversial and have generated significant debate in the country.
According to José Luis Escrivá, the pensions minister of Spain, the proposed measures would deviate from the conventional approach to pension reform. He dismissed the French government’s attempt to increase the retirement age as an outdated method.
The Spanish government is proposing several measures to fix its pension system. One of the key proposals is the “intergenerational equity mechanism”, which requires people in work to contribute more to the social security system.
Redistributing wealth?
While some experts believe that the mechanism is a fair way of redistributing wealth from older people to younger generations, others argue that it is perverse and unfair.
Additionally, the government is proposing to generate new revenue by requiring companies and employees, particularly those who are highest-paid, to contribute more to the pension pot. This new revenue will be used to reduce injustices such as the punitive impact of missed contributions on women who gave up jobs to look after children.
The government is also repealing the 2013 pension reforms, which were passed by the conservative People’s Party government.
These reforms were politically intolerable because they cut benefits for existing retirees. The government hopes that the new reforms will be more acceptable to the public because they are focused on making younger generations pay more.
Curbing one of highest debts in Europe
The reforms are part of Spain’s efforts to achieve financial sustainability while balancing the needs of current and future pensioners. Spain‘s public debt is equal to 116% of gross domestic product, making it one of the highest in the European Union. This high level of debt means that the government must find ways to reduce its spending and increase its revenue. However, it must also ensure that it provides a decent pension for existing retirees and intergenerational fairness for young people.
The challenge for Spain is to achieve all three of these goals at the same time. While achieving two of these goals is manageable, achieving all three is hard. Furthermore, Spain’s pension system is more dependent on state pensions than most other European countries.
This means that the benefits of existing pensioners are comparatively generous, with the size of their pensions equating to 80% of net pre-retirement income. This is ahead of France’s 74% and an average of 62% in the Organisation for Economic Co-operation and Development (OECD) club of countries.
The European Commission is pressing Spain to act to reform its pension system. It has made a fairer and healthier pensions system a prerequisite for doling out billions of euros of EU recovery funds. While the commission has positively assessed previous pension changes made by Spain, it has yet to review the latest reforms. However, Airef, Spain’s independent fiscal watchdog, has already issued a judgment that the reforms, in the round, will not pay for themselves and will increase Spain’s budget deficit by 1.1 percentage points of GDP by 2050.
The demographic pressures on Spain’s pension system are stark. Currently, there are three people of working age for every single pensioner in the country. However, by 2050, that dependency ratio will drop to just 1.7 to one. This sharp drop is explained by Spain’s life expectancy of 83, which is one of the world’s highest, and the fact that its baby boom came late.
Although Spain’s civil war ended in 1939, the country did not experience the surge in pregnancies that followed the end of World War II elsewhere. Instead, the first years of Francisco Franco’s military dictatorship were marked by hunger, repression, and international isolation. The birth rate did not climb until the late 1950s when the Spanish economy has slightly recovered.
Path to economic recovery
In the meantime, it is crucial for the Spanish government to implement policies that will support the country’s economic recovery. One significant issue that Spain faces is high unemployment. According to Eurostat, the unemployment rate in Spain was 14.8% in January 2021, which is higher than the EU average of 7.5%. The pandemic has only exacerbated this problem, as many businesses have closed or reduced their operations, leading to job losses.
To address this issue, the Spanish government has implemented various policies, such as job protection plans, subsidies for businesses, and financial aid for unemployed workers. These policies have helped to cushion the impact of the pandemic on the labor market. However, the government needs to do more to create new jobs and boost economic growth.
Alternative options
One potential solution is to invest in renewable energy, which could create new jobs and reduce Spain’s reliance on fossil fuels. Spain has a favorable climate for renewable energy production, and the government has set a target of producing 100% of the country’s electricity from renewable sources by 2050. Investing in renewable energy could also attract foreign investment and boost economic growth.
Another issue that Spain faces is the high level of public debt. According to Eurostat, Spain’s public debt was 117.1% of GDP in 2020, which is above the EU’s recommended limit of 60%. The pandemic has only worsened this problem, as the government has had to increase spending to support businesses and workers.
To address this issue, the Spanish government needs to implement fiscal consolidation measures, such as reducing public spending and increasing taxes. However, these measures could also have a negative impact on economic growth, so the government needs to balance the need for fiscal consolidation with the need for economic stimulus.
COVID-19 pandemic has had a significant impact on the Spanish economy, leading to a sharp contraction in GDP and high levels of unemployment and public debt. However, with the rollout of vaccines and the easing of restrictions, there is hope for a gradual recovery in the coming months.
To support this recovery, the Spanish government needs to implement policies that will create new jobs, boost economic growth, and address the country’s high level of public debt.
By doing so, Spain can emerge stronger from the pandemic and build a more resilient economy for the future.
