Jakob Suwalski (Scope Ratings | France and Spain have enacted pension reforms this year to put their pension systems on a sounder financial footing and boost employment, but doubts remain about their long-term sustainability and impact on the economy, given their similar demographic trends.
The content of the reforms is also different. France (AA/Stable) aims to rebalance its pension system by raising the statutory retirement age from 62 to 64 and requiring longer contributions for a full pension. In contrast, Spain (A-/Stable), whose statutory retirement age will rise to around 67 in 2027, focuses on increasing contributions from companies and younger workers.
However, the challenge is fundamentally similar: dealing with the inevitable rise in the cost of providing retirement income in countries with tax-funded pension systems where the gap between the proportion of working-age and retirement-age adults is widening.
The reforms in both countries only represent an increase in overall improvements, raising the long-term tax burden in the case of Spain and having only a marginal impact in the case of France, while offering no immediate solution to the problem of chronic underemployment of older members of the labour force, hence the need for deeper reforms.
The French and Spanish economies are characterised by high unemployment before retirement.
France and Spain have ageing populations and below-replacement birth rates, although the intensity of the pressures differs. In Spain, the population is ageing rapidly, while the fertility rate is one of the lowest in Europe, leading to a shrinking labour force and a growing elderly population, hence the pressure on the pension system, which is in deficit. In contrast, the ageing of the population in France is more gradual, mainly due to a higher fertility rate.
Figure 1: Demographic pressures in Spain are stronger than in France
Source: European Commission Ageing Report 2021, Scope Ratings.
France and Spain stand out for their very low levels of employment among older workers. In 2021, employment rates for workers aged 55-64 were below 56% in both countries, compared to an average of around 61% in the euro area.
Spain’s priority in its pension reform was to benefit the most vulnerable, such as those with irregular careers, and to avoid cuts in pensions for young people through a progressive increase in the contribution ceiling and the creation of a solidarity quota. The reforms include an alternative calculation for the payment of pensions that extends the calculation to 29 years of work, discarding the lowest paid 24 months.
These measures require a significant increase in pension expenditure over the coming decades without increasing contribution revenues, despite some compensatory measures: freezing of maximum pensions, incentives to delay retirement, introduction of a solidarity levy and doubling of the EMI tax rate to 1.2% in 2029.
Figure 2: Pension spending in Spain and France is among the highest in the OECD.
Pension deficit rises in Spain; doubts about eliminating France’s deficit
Spain’s total public spending on pensions will rise steadily after this reform to 16.2% of GDP in 2050, from 13.6% of GDP in 2021, according to a report by AIReF. Over the same period, the structural deficit of the pension system will increase by around 1.1 percentage points of GDP, above the government’s estimate of a more benign increase of 0.3 percentage points. The increase in social contributions falls mainly on companies, which in turn may weigh on job creation and wage growth.
In France, the recently adopted reform may be insufficient to close the financing gap in the pension system, according to recent estimates by the Rexecode think tank, which consider the government’s projections to be too optimistic. The resulting net tax gains of a modest 0.6% of GDP by 2030 would leave the pension system with a deficit of around 0.2-0.6% of GDP. Exemptions have diluted the impact of extending the retirement age, so most of the gains would come from increased tax revenues based on assumptions of higher medium-term growth and employment growth.
While we see less fiscal urgency for further pension reforms in France than in Spain, the question is whether the lack of political consensus on those just enacted will slow down the French government’s attempts at further structural reforms – and whether Spain can further leverage its consensus to lengthen its pension system.