The government is slowly rebuilding a pension fund that has been damaged and depleted. The reserve that should cushion the retirement of the baby boom generation stands at 6.098 billion euros today. A small portion of the 66.815 billion euros reached in 2011, before the state, then led by Mariano Rajoy, began emptying it to cope with the effects of the financial and real estate crisis.
The objective of the Ministry of Inclusion and Social Security, led by Elma Saiz, during this legislature is to keep feeding the fund. Six months ago it held 5.3 billion and now it approaches 6.1 billion euros. Progressively, through renewed social security contributions and the growing number of people in work, the state is boosting the reserve for the future. Demographic forecasts show that in the medium term Spain will spend more than it will collect from employment contributions, which will force successive governments to pull levers to balance the equation.
The government has set a target to close 2024 with about 9.0 billion euros in the reserve fund and to end the legislature with a positive balance of 25.0 billion euros, which would be less than half of the peak reached before the 2008 crisis.
The number of pensioners is rising—a consequence of aging across Western societies—along with the amount paid out in pensions. In the most recent January period, the Social Security system paid a total of 10.1 million contributory pensions to 9.2 million beneficiaries, representing about 11.5 percent of Spain’s GDP in terms of payout.
Nuevos ingresos
The latest pension reform, approved in the previous legislature, introduced a progressive rise in social contributions to fund the reserve. At present, the main pillar is the Intergenerational Equity Mechanism, MEI, an annual contribution split between workers and employers. From next year a solidarity tax will also apply, targeting the higher portions of wages that are not currently taxed by social security.
These are two of the new revenue channels introduced in the pension reform, to be rolled out in layers through 2050. The reform has been endorsed by the European Union, though bodies such as the Independent Fiscal Responsibility Authority and the Bank of Spain have criticized that its revenue-raising capacity may be overstated and that additional measures, either further cuts or new income streams, will be necessary to keep the system sustainable.
Other reforms now under negotiation by Elma Saiz’s department aim to bolster system sustainability. They include incentives for Spaniards who can and want to retire later, and negotiations with employers and unions to allow workers who choose to do so to combine pension receipt with continued employment beyond the legal retirement age. While this would pose a fiscal cost, it would also maintain social security contributions from ongoing employment.