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Spain: the debate on pension reform arises again

2/19/2021

On the political front in Spain, the start of the year has been marked by a vigorous debate on pension reform, and more particularly on the question of a possible change in the calculation of pensions.

Guillaume DERRIEN

TRANSCRIPT // Spain: the debate on pension reform arises again : February 2021

On the political front, the start of the year in Spain has been marked by a lively debate on the pension system, and more particularly on the question of a possible change in the way pensions are calculated. Tensions that occurred within the coalition Government itself, between the Social Security Minister José Luis Escrivà and the Deputy Prime Minister Pablo Iglesias.

These discussions are important, given that spending on pensions accounts for more than 12% of GDP today. This figure is likely to increase further in the coming years, as the aging of the population continues.

The question of an overhaul of the pension financing system needs to be asked in Spain. The country is, in fact, one of the developed economies where the long-term trajectory of the pension system seems the least viable. Two main elements contribute to this: (i) a replacement rate, which is one of the highest among OECD countries (ii) a dependency ratio which will increase in the coming years comparatively faster than in other developed countries.

This issue will become even more important in the coming months as the European Commission would require Madrid to guarantee the sustainability of its financing system in order to validate the payment of part of the sums allocated via the European Recovery Fund.

Even if fiscal policy will remain very expansionary in Spain in 2021, a return to more controlled public spending will be necessary in the long term. However, the European Commission estimates that Spain's structural deficit will continue to widen above 7% of GDP in 2022, even as the structural balance of most other European countries will tend to improve.

With the hope of a gradual normalisation of activity as the vaccination campaign progresses, the pressure on Madrid to move faster on its structural reform agenda will intensify. Changes on the pension system is only part of this agenda but will certainly be one of the most politically sensitive.

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