Is the sustainability of the public pension system guaranteed by the latest reform?

Angel de La Fuente has published a report in Fedea (Spanish think tank) on the impacts from the latest reform of the public pension system in Spain. In his view, the net effect of the reform will be a sharp increase in the deficit in the coming years (up to 4.3% of GDP per year by 2050). Covering this deficit with general revenues (or public debt) could leave little room to finance higher spending on other growing public needs such as healthcare or dependency.

Most significant measures proposed by the government:

• New method to calculate the initial pension amount: It will allow the worker, during a transitional period of 20 years, to choose between the current system, in which the regulatory base of the pension is calculated as an average of the wages restated for inflation of the last 25 years of activity, and an alternative calculation (which will be compulsory at the end of the transitional period) in which the calculation period is extended to 29 years, but the 24 months with the lowest updated contribution base are discarded. According to Fedea, this measure can only increase expenditure in relation to the current model, as only those who obtain a higher pension with this option will opt for the extended calculation period.
  
  
• The "uncapping" of social security contributions: A gradual increase in the maximum Social Security contribution bases between 2024 and 2050, which will rise by 38% over the period, accompanied by the quasi-freezing of maximum pensions (the maximum pension will rise by only 3.15% over the period). According to Fedea, this measure will reduce the maximum pension from almost 80% to less than 60% of the maximum contribution base, which means a very remarkable reduction in the contributory component of the public pension system and, once fully implemented in 2050, this measure would increase revenue from social security contributions by, at most, 0.40% of GDP.
  
  
• The introduction of a solidarity levy on higher incomes: It will tax the part of wages exceeding the maximum contribution base at a gradually rising rate of up to 6%. It is estimated that this measure will raise revenue equivalent to 0.09% of GDP.
  
  
• Tightening of the Intergenerational Equity Mechanism (MEI): A staggered increase in the rate of the extraordinary contribution linked to the MEI, from 0.6 to 1.2 percentage points, which will be maintained until at least 2050 instead of only for the ten years initially envisaged. This increase will apply to all wage incomes below the maximum contribution base, which gives this instrument much greater revenue-raising power than previous measures. Fedea estimates an impact of 0.40% of GDP once the maximum rate is applied.

According to Fedea, the new measures, together with those previously approved (mainly annual indexation to the CPI and measures to delay the retirement age), will contribute to closing the estimated pension deficit for 2050 by 1.2% of GDP, which would stand at 5.5% of GDP pre new measures (mainly due to the existing deficit at the starting point in 2019, which will increase due to the annual indexation of pensions to the CPI).