The Spanish pension system has been in deficit for some time. Thus, this year, the payment of pensions will require a fund transfer of €50 billion that the Government must provide by diverting funds from other budget items. This amount—€50 billion annually—is exactly equivalent to what the Spanish State obtains by borrowing in the markets to finance the public deficit: €50 billion, or 3% of GDP.
The OECD warns that the public deficit has improved since the toughest years of the pandemic, but the structural component has barely decreased. Furthermore, the spending needs for pensions, healthcare, long-term care, and dependency will grow significantly: the dependency ratio will increase sharply between 2024 and 2054, and pension spending will rise from 14.5% of GDP to 16.1% in 2050, representing an increase of 3.2 percentage points in less than three decades.
Hence, the OECD—which has improved its growth forecast for Spain to 2.9% in 2025 and 2.2% in 2026—has urged the Government to reform the pension system because the system covers only 70% of the expenditure through contributions, and the reforms of 2021-2023 have increased its cost, not its sustainability. To straighten out the situation and achieve savings of around €40 billion, it suggests, for example, raising the period taken into account for calculating the pension to 35 years, adjusting the retirement age to life expectancy, and reforming unemployment subsidies so that they do not generate pension rights. The OECD advises against continuing to increase labour costs due to the risk of exacerbating low productivity and impacting employment.
Regarding the fiscal chapter, the OECD recommends broadening the VAT base, reviewing tax benefits that generate distortions, and moving towards taxes more oriented toward incentivizing employment and investment. It also suggests reforming property transfer taxes, which are among the highest in the OECD, to improve residential mobility and reduce friction in the housing market.
In parallel, there is also ample margin to increase revenue by imposing higher taxes on tobacco, alcohol, and products harmful to health, given that taxes on alcoholic beverages are among the lowest in the EU.
According to the OECD, reforms in pensions, taxation, housing, productivity, and employment are essential to ensure Spain maintains solid growth.
