The fourth largest economy in Europe, Spain seems like a prosperous country. But despite a strong tourism industry and a profitable geographical position, the highly internationalized stronghold suffers a slew of chronic economic failures. Threatened by rising unemployment, increasing debt, and the bankruptcies of local businesses, Spain has been ailing for decades and is now spurred even further into decline by the lasting effects of the 2008 financial crash and the COVID-19 pandemic. Teetering on the edge of serious economic failure, the Spanish government has launched a desperate bid to reform its hemorrhaging pension spending before the country can fully collapse.
The pension problem represents a combination of Spain’s demographic, political, and political shortcomings. Draining tens of billions of dollars from Spain’s budget each year, the problem only is set to get worse as Spain’s aging population continues retiring and collecting its pensions in higher numbers. This presents a serious issue for the Spanish economy: Spain has one of the top highest average ages, while also being among the top ten countries with the lowest fertility rates. Currently, around 19 percent of the country’s population is above the age of 64 years, and it is predicted by 2050 that percentage will reach 30 percent. Needing to accommodate an extra six million retirees, and already operating at a deficit, Spain has little time to piece together its already faltering system more strain is added.
Normally, a country grappling with long-term retirement solutions would have time to adjust its failings, but, because of decades of Spanish fiscal policy, the problem of funding of future pensions is both immediate and expensive. Spain’s pension system is similar to a pay as you go arrangement, with current employed workers paying for the pension of the elderly, and expecting to receive the same treatment from the generation after them. Unfortunately, this system wasn’t prepared for the two major shocks it received in 2008 and again in 2020, when millions of jobs were placed in jeopardy and some were prematurely forced into the welfare system.
Spain provides one of the most generous pensions in all of Europe, providing retirees an average of 83 percent of their final salary compared to the Eurozone average of 58 percent. Now facing 120 percent of its GDP in debt, that’s money Spain doesn’t have. But nor do its citizens—because of the high pension rate, most Spaniards have neglected to save separate stores of money for their retirement. Hence the deadlock in which any pension reform is met with harsh backlash.
It is only recently, after decades of urging by international bodies such as the OECD, the International Monetary Fund, and the European commission, that Spain has finally begun to make changes. In the past months, Spain has pushed a new reform, raising the legal retirement age from 65 to 67, while also offering to pay $14,000 yearly to those who put off retirement, and threatening to cut the payment of those who retire early. However this isn’t necessarily progress: pensions will now be adjusted along with inflation, rising year after year along, presumably, with Spanish debt. Originally repealed in 2013, pensions were reinstated and hiked again in 2018 due to complaints of the loss of purchasing power. Now fully instated, “pensioners will no longer have to worry about the evolution of their pension,” says socialist Budget Minister Maria Jesus Montero. Even so, to many, this change seems to be only delaying the problem. Adjusting pensions to match inflation means that pensions will gradually get more expensive as time passes, potentially creating even more debt. “Outrageous. The system is not sustainable,” argues Rafael Pampillon, head of the economics department at Madrid’s IE Business School.
Although only a small reform for a national issue, Spain’s pension problems demonstrate to the wider world the fragility of our economic systems, and how difficult it is to change those respective systems. Yet regardless, Spain’s new legislation, good or bad, represents a positive step after decades of stagnancy, showing the world that change is indeed possible.
By: Raymond Ge