School of Economics research warns Spanish pension system reform could have worsened pensioner’s economic position

The last major reform of the Spanish retirement pension system, implemented in 2013, intended to be a major step towards sustainability. However, it also implied foreseeable strong and negative effects on “adequacy”, defined as the extent to which pensions guarantee a sufficient level of income for the elderly. As a result of this reform, pensioners would see their relative economic position worsened throughout forthcoming decades, as a study co-authored by the UB School of Economics researcher Concepció Patxot reveals.

The article, entitled “Sustainability and Adequacy of the Spanish Pension System after the 2013 Reform: A Microsimulation Analysis”, has been published in the scientific journal Hacienda Pública Española/Review of Public Economics. The researchers Meritxell Solé (Universitat de Barcelona) and Guadalupe Souto (Universitat Autònoma de Barcelona) co-authored the study with Concepció Patxot (Universitat de Barcelona).

Concerns about the consequences of demographic ageing on the sustainability of the pension system led to the adoption of reforms reducing pension expenditure. In 2013, the Spanish government implemented a reform which introduced two adjustment factors to foster sustainability. On the one hand, the “sustainability factor” linked the amount of the new retirement pensions to the evolution of life expectancy. On the other hand, the “annual revaluation index” was designed to update pensions according to the budget balance of the Social Security.

The authors of the study foresee a significant reduction in total expenditure on retirement pensions thanks to the reforms. As a result, the adjustments on the pension system would also stop and reverse the trend observed over the last two decades during which pensions have grown at a faster rate than wages. Precisely, the gains in sustainability were mainly driven by the significant fall in the average pension compared to the average wage. This means that the relative economic position of pensioners would deteriorate continuously throughout forthcoming decades, in contrast to the situation experienced in past decades.

The results show that from 2030 onwards the percentage of pensioners receiving earnings below the median income would be close to 80%, while this figure is less than 65% in the scenario without reform. It is important to highlight that the risk of poverty is defined as the situation in which a pensioner receives a pension below that of the median income of the economy. As a consequence, the implementation of the reform is set to increase the risk of poverty among pensioners in the future, as it worsens the relative position of pensioners with regard to workers.

“This reform was not perfect, but was a somehow serious attempt to face the problem”, explained Concepció Patxot. “The retiree complained and the government decided to suspend the application of the sustainability factor from 2019 to 2023 and cancelled the annual revaluation index. Good news in terms of adequacy, but only in the short run. This decisions means bread today and hunger tomorrow. Who is going to face pension cuts in an increasingly aged society? Bad news for the scarce workers who will be also in charge of the human capital of future generations”, she added.

---