A perfect storm of factors could be putting Spain’s public pensions at risk. The concern is such that a common refrain among Spaniards (particularly the younger ones) when discussing the future of their pensions is simply that ‘there won’t be any’ or ‘we’re not going to have one’.
Long-term demographic change, slowing birth rates among Spaniards, plus the looming prospect of a larger than usual cohort of retirees and the types of pensions they usually claim mean that, if Spain is to avoid pensions payouts swallowing up more and more of its economy, then changes will be needed — sooner rather than later.
In 2023, Spain spent over €170 billion on pensions, €15.8 billion more than in 2022, and an amount that has been increasing in recent years. Because Spain’s pension payouts are growing in both absolute terms (new retirees have higher pensions) and in relative terms (as a percentage of GDP and the government’s budget) some in Spain are questioning how sustainable the model is.
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But why is public spending on pensions going up so significantly, and are they at risk?
A combination of an ageing population, declining birth rate and rapidly approaching generation of baby boomers due for retirement, plus the fact that Spaniards tend to go for public pensions as opposed to private, means that some in the Spanish media worry Spain’s pensions are in danger.
The ageing baby boomers
Much of the concern comes from Spain’s demographic trends. Put simply: in a few years Spain will be disproportionately older and lacking in working age people.
By 2035 around one in four (26.0 percent) of Spaniards are expected to be 65 or older. That figure is currently just 20.1 percent of the total population, and by 2050 it could rise to 30.4 percent.
On top of that, there’s the looming prospect of the baby boomer population beginning to retire. By 2030, almost 4 million baby boomers will already be enjoying their retirement, a figure that will exceed 11 million in 2040. The baby boomer generation is much larger than previous generations, and spent their working lives earning better salaries than their predecessors, something that will be reflected in their pensions.
Birth rate
In order to compensate for its ageing population, Spaniards would need to have more children in order to be able to offset this building demographic pressure on its pension system. However, that’s far from the case.
The birth rate in Spain has been declining for around a century. Last year, Spain registered 322,075 births, which represented "a 2.0 percent fall on the previous year", an INE statement said, with a spokesman confirming it was the lowest figure since records began in 1941.
Spain's fertility rate is the second lowest in the European Union, with the latest figures from Eurostat showing there were 1.19 births per woman in 2021, compared with 1.13 in Malta and 1.25 in Italy.
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Spaniards not investing in private pensions
Another factor heaping more pressure on Spain’s public pension systems is the fact that very few Spaniards invest in private pension plans.
The latest OECD report on assets deposited in private and funded pension funds shows that Spaniards pay in considerably less than other OECD countries. In fact, the weight (in terms of GDP) allocated to private pensions products in Spain is seven times lower than the OECD average.
Spain's total assets amount to 14.3 percent of GDP, a far cry from the OECD average, which is slightly above 105 percent. Spain ranks 25th out of 38 countries in the report, well below the average. For comparison, in Denmark total assets in pension funds and plans represent 233.2 percent of GDP, followed by Iceland (218.6 percent), the Netherlands (213.3 percent) and the US (174.1 percent).
Estimates suggest that just 16.4 percent of Spaniards have at least part of their retirement savings deposited in private plans, meaning that the vast majority of payouts come from the public coffers.
What's the solution?
It seems clear that the Spanish pension system is facing a number of challenges in the medium-term future. An ageing population, combined with a disproportionately large (baby boomer) generation due for retirement, low birth rates, and scarce investment in private pension schemes all mean that Spain’s public pensions will continue to cost more and take up more and more of its state spending.
So, what’s the solution?
As the debate picks up strength (and urgency) in Spanish politics and society, a few possible ideas have been floated. One would be to delay the retirement age. Spaniards who want to retire in 2024 with 100 percent of their pension will now have to be at least 66 years and 6 months old, but some experts have suggested delaying the statutory age to as late as 74 in some cases.
Of course, in order to do this, the older workforce would likely need significant retraining and cooperation between the public and private sectors not only to find work for these people but also arrange their pension pots in a way that doesn’t place a further burden on the public coffers. Many also point to the creation of more flexible and accessible semi-retirement schemes, in order to allow older people to work less without claiming their full pension.
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Another longer-term option would be to do something to stimulate the birth rate in Spain, though that solution would only help in a minimum of 18 years. However, some kind of tax-based incentive scheme to encourage Spaniards to have more children, such as in Hungary, could be useful in providing part of the solution at least.
In reality, many in Spain have already accepted that the most immediate and easiest way to try and ease the burden of public pensions is for mass immigration into the country. Though this may ruffle some feathers within more conservative elements of Spanish society, the reality is that Spain needs to offset its massive public expenditure on pensions and it won’t be able to do this without a young workforce ready to pay into the system.
Spain’s Minister of Inclusion, Social Security and Migration, Elma Saiz, has estimated that Spain needs at least 250,000 immigrants a year to support pensions. If demographic modelling from Spain’s INE is accurate, current migratory trends could help in this regard because the Spanish-born population will see a steady decline and fall from 84.5 percent, the proportion of the population currently, to 63.5 percent within 50 years.
To put that statistic in other words, by 2072 36.5 percent of people resident in Spain, a little over one in three, will be born in another country.
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