Spain | Will the pensions reform increase their financial and social sustainability?

Summary

This article assesses the contribution to financial and social sustainability, of the draft bill covering the recent agreement on pensions reached between the government, unions and employer organizations.

Key points

• Key points:
• This reform involves three main measures. First, the replacement of the revalorization pension scheme (the "IRP" in Spanish) introduced in the 2013 reform and the commitment to update pensions annually in line with the consumer price index (CPI).
• Second, the modification of early retirement correction coefficients and of the incentives for late retirement, with the aim of increasing the effective retirement age.
• Third, the substitution of the Sustainability Factor by an Intergenerational Equity Factor in the future.
• Current estimates suggest that the removal of the Sustainability Factor and the IRP will increase pension expenditure by more than three GDP percentage points in the next few decades, to add to the existing deficit of over 2% of GDP. The increase in the retirement age resulting from the proposed measures should see savings of a few tenths of a point of GDP in the best case scenario.
• These results indicate that future offsetting measures will be needed in order to provide the equivalent impact savings to those they have replaced — if the sustainability, contributivity and self-sufficiency of the Spanish pension system is to be preserved.

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