Spanish Pensions’ Replacement Rate Is Third Highest In Eurozone

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Today, the main problem for Spain’s Social Security is its sustainability. Even without completing the demographic transition process, the public institution that manages a larger budget in Spain drags around with it a deficit of 1.4% of GDP. Over the last three years, the State has had to cover this with contributions of over 40.000 billion euros. According to a study by Funcas, the problem is not only the current deficit, but its future evolution. This is due to the increase in the dependency rate, the impact of the new technological revolution on employment and wages, and longer life expectancy.

Social Security activities accounted for 30% of public administrations’ consolidated expenditure in 2018, or more than 148.000 billion euros. This was almost entirely in the form of benefits to households. Amongst these, contributory pensions stand out, both in terms of the number of beneficiaries and in committed expenditure. So these are the key to the system’s sustainability. Expenditure on these benefits has multiplied by 5.6 since 1977 (467%) due to the higher number of pensions (from 3.8 to 9.7 million; + 155%); the average amount (from 418.33 to 927.87 in constant euros of 2018; + 122%). In terms of income in general, Social Security benefits (not including unemployment protection) went from representing 5.95% of GDP in 1977 to 11.80% in 2018. Meanwhile, social contributions (also not including those earmarked for unemployment) dropped from 9.97% of GDP to 9.52%.

Funcas’ experts agree that the replacement rate, one of the highest in Europe, will need to be reduced. More specifically, action will need to be taken with regard to the parameters which determine the initial pension, as well as the effective retirement age. It does not seem feasible that funding through taxation can go too far, even if it does help, given the public deficit problems and the need for expenditure on other items.

The average replacement rate in Spain -which is defined as the average pension divided by the economy’s average salary – is 57.7%. This is the third highest in the Euro Zone, 13.6 points over the Euro Zone’s average and 7.2 and 15.7 points higher than that in France and Germany, respectively. Regarding the gross retirement replacement rate, which links the initial pension to the last salary amounts received during a person’s working life, Spanish pensions rank first. They exceed the Euro Zone average by 28.8 points (78.7% vs 49.9%).

Funcas argues that the effects of ageing on economic growth could be partially mitigated by the increase in labour participation amongst groups such as women and people over 55, the extension of the working life, the management of migratory flows or productivity improvement. But given the demographic scenarios, these measures would not be sufficient to meet the expected growth in spending. That is if, in addition, the purchasing power of current pensions and the financial sustainability of the system are to be preserved.


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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.