Spain | The mirage of the pension reserve fund

Following Law 21/2021 and the Intergenerational Equity Mechanism (IEM), Social Security contributions rose by 0.7 points without generating higher future pensions. Although the reserve fund is growing, the pensions system faces a significant deficit and raises questions about its sustainability and necessary reforms.

Key points

• Key points:
• Law 21/2021 increased Social Security contributions by 0.7 points through the IEM, without this implying an increase in future pensions, since the funds are allocated exclusively to the Social Security Reserve Fund.
• Despite the growth of the reserve fund, the pensions system presented a contributory deficit of 2% of the GDP in 2023, only 7.5% of which was covered by revenues from the IEM. The funding needs of the system require tax resources and government debt.
• The accumulation in the reserve fund has generated the erroneous perception that the pension system has surpluses, which could make it difficult to understand the need for structural reforms in the system.
• In 2023, expenditure on pensions in Spain accounted for 13.1% of GDP, one of the highest in the EU. This expense is expected to increase in the coming years, due to the high benefit rate and low employment rate in the country.
• The concentration of public expenditure on pensions, to the detriment of other investments such as housing and human capital, is negatively affecting opportunities for young people and long-term economic growth in Spain.

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