Spain is moving forward with pension reforms that include a controversial solution to years of expensive promises to retirees: make the youngest pay more.
While France is in rebellion As for plans to raise the minimum retirement age from 62 to 64, Spain’s threshold has been 65 for decades, forcing it to look for other ways to shore up a troubled pension system while simultaneously be fair to young and old.
After repealing 2013 reforms that had become politically intolerable for cutting benefits for today’s retirees, Spain’s socialist-led government will ask lawmakers on Thursday to approve a new package that demands more from the younger generation.
José Luis Escrivá, Spain’s pensions minister, said the measures would move away from the “traditional paradigm of pension reform”, describing the French effort to raise the retirement age as an old-school approach.
Adopt measures rejected by France, Spain it will draw new money into the pension fund of companies and employees (especially the highest-paid) and then use it to reduce injustices like the punitive impact of missed contributions on women who quit their jobs to care for their children.
“We have created revenue-generating measures that will strengthen the system so that we can finance further increases in spending,” Escrivá told the Financial Times.
But there is controversy over a source of revenue called the “intergenerational equity mechanism.” Although its name implies a redistribution from older to younger people, it actually implies that working people have to contribute more to the social security system.
“Most experts think that the title of this mechanism is perverse. It’s the opposite,” said Rafael Doménech, an economist at BBVA bank who advised on the repealed 2013 reforms, which were approved by a conservative Popular Party (PP) government.
Escrivá questions the characterization. But Spain’s efforts exemplify the impossible dilemmas facing many European countries: how to balance decent pensions for retirees, intergenerational justice for young people and financial sustainability.
Achieving two of these goals tends to be manageable. Securing all three is difficult. Certain characteristics of Spain make its challenge even more difficult, starting with the urgency of reducing its public debt burden, which is equivalent to 116 percent of gross domestic product.
Another is that the country has not fostered a competitive market for 401k-style private pensions as seen in the United States or widespread employer-based plans. That means older people’s reliance on state pensions (with active workers financing current retirees’ benefits) is higher than elsewhere.
Partly for this reason, the benefits of today’s pensioners are comparatively generous. The size of their pensions is equivalent to 80 percent of net pre-retirement income, ahead of 74 percent in France and an average of 62 percent in the OECD club of countries.
The European Commission is pressuring Spain to act. It has made a fairer and healthier pension system a prerequisite for doling out billions of euros in EU recovery funds. The commission “positively assessed” the pension changes Spain made for earlier payments, but has yet to review the latest reforms.
Airef, Spain’s independent fiscal watchdog, issued its opinion last week, saying the round’s reforms would not pay for themselves and would increase Spain’s budget deficit by 1.1 percentage points of GDP by 2050.
Population pressures are harsh. Today in Spain there are three people of working age for every pensioner; by 2050 that dependency ratio will be only 1.7 to one. The sharp drop is explained by the Life expectancy 83 years old (one of the tallest in the world) and the fact that its baby boom came late.
Although its civil war ended in 1939, Spain elsewhere did not experience the surge in pregnancies that followed the end of World War II. On the other hand, the first years of the military dictatorship of Francisco Franco were marked by hunger, repression and international isolation. The birth rate did not increase until the economy began to take off in the late 1950s. The first Spanish baby boomers are just beginning to retire.
They are an irresistible force, but politicians have made today’s pensioners an immovable promise, limiting their options for reform. In a letter addressed to them last year, Escrivá wrote: “Whatever the circumstances, you must be sure that the purchasing power of your pension is always guaranteed.”
His sentiments reflected a consensus on the 2013 reforms on the political left. To limit costs, they had introduced mechanisms that would cap monthly pension payments when the system was in deficit and reduce benefits as average life expectancy increased.
These reforms were supposed to come into effect in 2019, but never did. As soon as the real pensions of 10 million people who vote were cut, the reforms became unacceptable to the Socialist-led government. Parliament voted to remove them in 2021, although the PP opposed the decision.
That left Spanish pensions simply pegged to inflation. As a result, they increased 8.5 percent in January, a better result than the average increase of about 3 percent for salaried workers. The average payment becomes €1,191 per month and the maximum is €3,059*.
“It’s not about being generous. It is about guaranteeing that pensioners have a dignified life,” said Fernando Luján, from the UGT union, which supports the latest reforms.
They are opposed by the CEOE, the main business lobby in Spain. He is not only complaining that employers have to make more contributions to social security, one of the main concerns of President Emmanuel Macron in France. But the business group also highlights the unfair treatment of young people, who are already the main victims of high unemployment, low wages and insecure jobs.
Rosa Santos, director of labor relations at the CEOE, described the intergenerational equity mechanism as a tax. Young people “are going to have to work more years to receive the same pension as current pensioners -and that in the best of cases, which is doubtful-, having contributed much more to the system,” she affirmed.
Avoiding criticism of contributions, Escrivá argued that the reforms promote equity because “in relative terms the pensions of young people will improve more than those of the elderly.”
The government calculates that the reforms would add 5,300 euros to the pension of someone who is 60 today, but would give an additional 20,000 euros to a 25-year-old.
As long as the benefits of today’s retirees are untouchable, it may be the best deal young people can get.
Data visualization by Alan Smith
This article has been modified since its initial publication to correct the figures for the average and maximum monthly pensions in Spain.