CSN News: Pensioners in Spain increasingly receive more than they paid for their pensions, except one group.

Spain’s pension system is less than one month away from its first test. Before 1 April, the independent authority for fiscal responsibilities (AIReF), will present a report assessing the effect of new measures aimed to delaying the retirement age and balancing pension books. This analysis will be crucial to know if it is necessary activate the ‘closure’ clause and take additional steps to ensure sustainability.

However, the institute for actuaries in Spain has already issued its verdict: the pension reform designed by the current governor of the Bank of Spain, José Luis Escrivá, has not been sufficient to achieve that financial balance and guarantee the sustainability of the system, as pensioners are receiving increasingly generous benefits and the gap between what they receive and what they contribute is widening.

The report concluded that “the reforms implemented in 2021 and in 2023 were insufficient, and failed to reduce the growing imbalance in the actuarial value of pension income received by a person in retirement, and the actuarial value of pension contributions made during the working career.” This group of professionals, who use statistics and financial theories, analyses the risks associated with future scenarios, and quantifies the financial impact of certain events.

The group of money market experts warns that “the imbalance between what the Spanish pension system receives and what it pays in contributions has continued to worsen for the past five years.” The generosity of the pension system has increased despite attempts to contain expenditure. According to their calculations, a person with a career that has been uninterrupted and who pays the average pension contribution, or what they call a ‘typical’ individual, will receive 62% more as a retiree than the amount he/she contributed via social security. In 2020, the same individual would have only received 55% more. The effectiveness to balance the system was hampered by two external forces: a longer lifespan (the probability of surviving has increased 1% over the last five year) and the possibility of a future lower economic growth.

Automatic Adjustments

The amount of money that most retirees receive has increased, but for two groups, it’s been drastically reduced: those with a shorter working life, and those who take an early retirement. This is because of the two most recent pension reforms that were implemented in Spain. Not only the 2011 reform, but also the one from 2011, which postponed retirement and increased the years of contribution. The ordinary retirement age in 2025 will be 66 and 8 months. It was 65 and 10 months in 2020. In 2025, the age of retirement will be 65 years old for a career lasting 38 years, 3 months, or longer, but in 2020, it was only 37 years.

Actuaries warn that if no further action is taken, the generosity of the pension system will continue to increase to the point where the typical pensioner receives more than twice as much money for their contributions during their working years. The actuarial equity (the amount of euros that a pensioner will receive for every euro they contribute) will therefore rise to 2,14 in 2045, and to 2,20 in 2065, due to, again, the fact that people are living longer, and that economic forecasts have become less optimistic.

Accordingly, they advocate automatic pension adjustments that are linked to the life expectancy and the economic growth in line with what other European nations have done.