The future of pensions is a matter that generates chills just thinking about it. Doubts about the sustainability of the current system raise doubts not only for economists, but also for thousands of workers who contribute their salaries to benefits. The underlying problem, however, is demographic. The aging of the population during this century is enormous and the low birth rate is going to put all the public pension systems in the West, and of course, in Spain, on the ropes.
Currently, for every ten citizens of working age there are almost three of retirement age and the Social Security accounts already show a clear deficit. Calculations indicate that it will be 4.5% of GDP in 2050, or what is the same: 54,000 million.
A gigantic deficit. Current spending on pensions is around 13% of GDP. In total, this year it rises to approximately 190,000 million euros. And the future does not look better. According to the report Global aging 2023: The clock is tickingpublished by S&P Global, spending derived from the aging of the population will skyrocket in Spain to 22.5% in 2060. An increase that will not only be due to pressure on the retirement system of baby boomersbut that it will be necessary to cover the health and care of the elderly.
In fact, in the short term, calculations already project a deficit of more than 3% of GDP within a decade. This will lead to the following: a tightening of contributions to improve income or a cut in spending (whether by reducing pensions or extending the retirement age). Solutions contemplated in a reform that does not seem to come to fruition and that, according to economists, would barely add 0.27% of GDP.
A demographic origin. As we have mentioned in other Magnet articles, Spain is an increasingly aging country and that translates into a growing pension bill. To give you an idea: in 1960 the percentage of people over 65 years of age was 8.2% of the total population, in 2020 it has reached 22.9%. And it will continue to rise: between 2030 and 2070 there will be 5 retirees for every 10 citizens of working age, according to INE projections.
And, despite the fact that in the last 10 years income from social contributions has increased by around 46,000 million euros, the problem is that, at the same time, spending on contributory pensions and passive classes has also increased by 68,799 million euro. In other words, in just a decade and with record levels of employment, the pension hole continues to get bigger.
The second country with the most pension spending in the EU. “Spain will become the country with the second highest pension spending in the EU, only behind Greece,” warned the Bank of Spain in its report that compares national pension spending with that of the rest of the bloc’s countries . The two factors driving the phenomenon are aging and the generosity of the system.
How far would you have to go down to get there? According to data of population aging, employment rate, pension coverage rate, the weight of wages in GDP and the generosity of pensions, the calculations that appear in this article in El Confidencial show that the pensions that can be pay Spain with the income from current contributions would be 20% lower. In other words, the relationship between average pension and average salary would have to be reduced by 20% so that the system could be self-financing in the next 50 years.
What would this translate into? Taking into account the average pension, which is 1,368 euros per month in 14 payments, an adjustment of 20% would imply reducing the benefit by almost 300 euros per month for contributory pensions. A cut of about 4,000 euros a year.
There is more. According to reports from S&P Global, the deficit is even much higher than expected: up to 1.8% this year from the 0.5% estimated by the Government. This is because the firm includes 15,500 million euros in transfers from the State to the body for so-called “improper expenses” (non-contributory benefits of an assistance nature, certain employment incentives, support measures for families…) and which, according to the report, must be taken into account if the country intends to reduce its deficit and stick to the Brussels objectives.