There is an undeniable reality surrounding the need to reform public pensions in Europe and in Spain, and that reality is the aging of the population and the demographic decline affecting our continent and our country. As Bruno Palier aptly states, “in 2017, there were more than 100 million people over 65 in Europe, compared with 85 million in 2008 and 38 million in 1960,” and European Commission projections foresee the number rising to 149 million by 2050. The retirement of the baby-boom generation and the approaching retirement of the so-called Generation X, together with the sharp drop in birth rates, will condition, whether we like it or not, the future of pensions.
“It is the retirement of the baby-boom generation and the approaching retirement of the so‑called Generation X, coupled with the sharp fall in birth rates, that will condition the future of pensions”
In fact, in Spain, as the INE indicates, demographic projections show the population aged 65 and over rising from the current 20.4% to a maximum of 30.5% in 2055, before easing to 30.3% in 2070. This makes the dependency ratio—the ratio of those under 16 and those over 64 to the working-age population between 16 and 64—reach a peak of 75.3% in 2052, then fall to 73.9% in 2074. If we wish to preserve a pay-as-you-go (PAYG) system as the central pillar of the pension model—where the currently active generation finances today’s retirements while also accumulating rights for its own future pension—guaranteeing a solidarity transfer of incomes between generations, reform becomes necessary. And it is much better to pursue parametric reforms, that is, changes to one or several components that are incremental (little by little) rather than systemic or comprehensive reforms all at once.
But there is also another crucial reality when discussing pensions and their future. This reality rests on ideological rather than factual grounds. We refer to the European Union’s, following the World Bank’s, commitment to establishing a multi-pillar pension model that substantially privatizes the European pension system. Thus, in several communications, the European Commission has defended the three-pillar structure that the World Bank has advocated since the 1990s. This system, as professor Rubio Lara notes, should rest on three pillars: a first pillar consisting of public pensions financed by general taxes to provide a basic pension; a second pillar consisting of mandatory private occupational pension plans, funded by the savings of participants—and which should be managed, of course, by the financial services industry; and a third pillar, voluntary, supported by private personal savings plans. In other words, two of the three pillars would be private funded pensions.
In this sense, beyond the failure of private pensions in Chile, which have offered tiny benefits to more than 90% of retirees, and leaving aside the panic triggered among American retirees who depend on the 401(k) plans after tariff measures under Trump and the subsequent stock market collapse, the truth remains that, besides their own volatility, capitalized private pensions are exposed to inflation and to numerous factors that can leave older people in a state of extreme vulnerability. So, what explains the World Bank’s stance, echoed by the European Commission, in favor of this system? In my view, it is an ideological answer: the push toward supply-side economics and the abandonment of Keynesian policies that the neoliberal model has imposed since the nineties.
The European model and the Commission’s push
The supply‑side policies, linked to globalization, seek to boost competitiveness across countries by a clearly visible reduction in labor costs—via labor-market activation policies—while aiming for fiscal surpluses or at least balance. Interestingly, this is achieved by cutting expenditures and prioritizing tax cuts on capital income over wages, while supposedly stimulating savings and investment. And what better way to feed capital and financial markets than with private pension plans, whether corporate or individual, funded through capitalization? This is the logic behind the World Bank’s position and that of the European Commission. In this regard, it is useful to recall—as Díaz, Loscos, and Ruíz Huerta emphasize—that policies based on the supply‑side approach failed to achieve their promised end goals—sustainable financial growth and more effective fiscal policy—, as was revealed by the 2008 financial crisis and the pandemic.
“Feeding the financial market with citizens’ contributions to private capitalization plans reflects a very specific ideological wager”
From there it becomes evident that nourishing the financial market with citizens’ contributions to private capitalization plans, even with EU backing, mainly represents a strong ideological bet. This can—and does—generate many more problems, including the sudden impoverishment of retirees and persistent anxiety. Not to mention, as Rubio Lara notes, that transitioning from a PAYG system to a capitalization one is almost impossible because a “double payment” would be required, necessitating a transition period during which workers would have to finance PAYG pensions and save for their own retirement.
Be that as it may, the truth is that given the realities and demographic prospects, a certain amount of reforms is inevitable. The European Commission itself, in its Green Paper on Aging, states that “it is likely that a larger number of pensioners and a smaller pool of workers will lead to higher contribution rates and lower replacement rates (the ratio of the initial pension to the retiree’s final salary) in order to guarantee the sustainability of public finances.” It then addresses the issue of intergenerational justice, noting that “the old-age dependency ratio in the EU in 2040 would only remain at the 2020 level if the working life were extended to seventy years.” The Commission also speaks with ideology when it mentions ideas such as a “silver economy” or the transmission of experiences between generations implying shared housing; yet the old-age dependency ratio is a fact that cannot be ignored. Now, if reforms are necessary, what reforms? How should they be approached? And in Spain?
What reforms should Europe and Spain pursue?
What reforms to tackle in Europe and Spain
Systemic or comprehensive reforms have largely been dismissed, both because of their difficulty and because of their risks and inequities. Instead, parametric and incremental reforms are on the table—those based on adjusting a single element and adding incremental improvements to what is already in place. One example would be tightening the link between contributions and the pension amount, that is, extending the “calculation period” used to determine the pension across the entire working life rather than a fixed span. That is precisely what Spain has done in recent reforms. Another option would be to raise the retirement age, an approach pursued in France (though currently suspended until 2028), in Spain and in other countries, and the European Union has even mentioned the figure of seventy. A further alternative is to index pensions more heavily to the Consumer Price Index (CPI), or even to detach them downward from wage growth, which would entail a reduction. And then there are the calculations to modify pensions based on sustainability factors and intergenerational equity mechanisms, depending on life expectancy, GDP growth, and the evolution of the old-age dependency rate, which, remember, is the ratio of the non-working population (children and those over 65 plus the working-age population).
There is also the notional accounts regime—which simulates some capitalization for a portion of pensions while keeping the theoretical fund under state control to avoid market risks—as implemented in Sweden, which, in my view, represents a further tightening of the incremental reforms. This approach could be substituted by incorporating sustainability factors and equity mechanisms.
“What should be done when wages are low and the European Commission itself says that poverty risk already haunts more than 18.5% of the bloc’s older people?”
So what should be done, as Bruno Palier asks, when wages are what they are, working careers are increasingly fragmented, and the European Commission itself notes that the poverty risk already threatens more than 18.5% of Europe’s elderly? What should be done, especially in Spain, when all these defects—low wages, fragmented career paths, poverty risk, and the near-certain risk of job loss at an advanced age—are even more pronounced than in continental and northern Europe?
To know what to expect, it is crucial to look at the data and relate them to one another. With them, we can discern what is actionable and what simply responds to external factors, third-party interests, or a particular ideology. Therefore, we will focus, on one hand, on the European Ageing Reports of 2021 and 2024, and on the AIReF report concerning the Spanish case.
Here we see the projected evolution in the two European Commission reports, 2021 and 2024, of public pension spending relative to GDP. Leaving aside the fact that the Netherlands has a long history (and efficiency) of private pensions, and that its spending is much higher, the relatively low pension expenditure in Germany stands out, even though it has carried out reforms to bolster private pensions. Sweden’s case can also be explained partly because a portion of the spending—such as housing subsidies—would not count under the pensions heading. The stance of Nordic welfare states’ supposed “welfare chauvinism,” which makes it as difficult as possible for immigrants to receive full pensions, is not a consideration here.
As for the high pension bill relative to GDP in Spain or Italy, we will see, focusing on our country, how this is explained by Spanish earnings and our labor market. It is also worth noting that the Spain section of the 2021 report corresponds to reforms led by the PP and the Rajoy government, while in the 2024 report the Commission has undoubtedly taken into account José Luis Escrivá’s pension reform.
In Tables 3 and 4, the replacement rate of pensions is shown, understood as the relation between the first pension and the last salary. Only Table 4 includes the effects of Escrivá’s reform. According to Table 3, in the Spanish case the projected replacement rate for 2070 would be 41.3%. This would mean a person with a last gross monthly salary of 2,000 euros would receive a pension of 826 euros, while someone earning 1,500 euros would see their pension reduced to 619.5 euros.
By contrast, Table 4—which contains updated calculations to 2024—offers a less deteriorated scenario. Under this projection, in 2070 workers with last gross salaries of 2,000 and 1,500 euros would receive pensions of 1,280 and 960 euros per month, respectively. In both cases, the figures for Spain are very low, although the 2021 estimates are particularly troubling, as they point to levels that would condemn a substantial portion of pensioners to genuine precarity.
The fifth table refers to the generosity rate. For Spain, we observe the same pattern as with the replacement rate: the figures are less bleak than those for the rest of Europe. For an average annual salary of 28,000 euros, the projection places the average pension in 2070 at 15,036 euros per year, resulting in a replacement rate of 53.7%. These are not very encouraging figures, although only Italy shows a somewhat better percentage. Now, why does Spain appear with higher rates than the rest? Does that mean our leaders are more generous or more protective of retirees than their European counterparts? The answer becomes clear when we look at wages.
Our high replacement rate—and, with it, the greatest present and future generosity of the system, which implies higher pension spending as a share of GDP—is explained by the fact that wages in Spain are among the lowest in Europe. If wages were similar to those in France or Germany, projections would show that, within a few decades, the vast majority of older people would be driven into extreme poverty. And this risk would affect women even more, since their wages are generally lower. By 2070, those who are today our sons and daughters, and the pupils in our schools, would face a miserable old age. It is worth recalling that, according to the INE, the average wage in Spain in 2022 was 26,948.87 euros, with men earning 29,381 euros and women 24,360 euros. And this is the average wage.
“If wages were similar to those in France or Germany, the vast majority of older people would be pushed into absolute poverty in a few decades.”
The modal wage, the most frequently occurring, stood at 14,586.44 euros, and the median wage (which divides workers into two equal groups) was 22,383.11 euros in 2022. Now perform the calculations using the replacement rate and the generosity rate, and you will understand the figures and the dire outlook we would face in a few decades compared with the percentages seen in other countries, or simply compared with the 2021 projection of a replacement rate of just over 41%. If you want to avoid those outcomes, we would be talking about an annual pension of around 11,200 euros for the average salary and about 9,243 euros (660 euros a month in 14 payments) for the median salary.
Reforms in the Rajoy era and Escrivá’s latest reform
In this regard, the European Commission, in its 2021 report, contemplated the reform undertaken by the Rajoy government, which followed the earlier Zapatero reforms, and comprised a double automatic adjustment mechanism: a) the so‑called intergenerational equity factor, which linked the pension to the retiree’s life expectancy at the time of retirement, thereby reducing the pension amount if life expectancy rose, and b) the annual revalorization factor, which allowed pensions to increase only gradually in line with or below the CPI. The result: a replacement rate of 41.3% for 2070, with the path clearly set to reach it. The dreadful data we have already discussed are, unfortunately, not new. The dollop of missing public debate is notable.
“The outlook is not good, but it is considerably less bad with the Escrivá reform, as AIReF confirms that average pension expenditure will stay below 15% of GDP”
Outlook is not promising, yet it is markedly less bleak under Escrivá’s reform. AIReF, in its report of March 31 of this year, which affirms that average pension spending will remain below 15% of GDP in the 2022–2050 period, lists these measures as the intergenerational equity mechanism (MEI), the evolution of the maximum social security contribution bases from 2024 to 2050, the additional solidarity contribution on higher salaries, the reform of the special regime for self‑employed workers (RETA), state transfers to the Social Security system to strengthen public pension revenues, and the lasting or structural impact of higher minimum wage increases and labor reforms on system revenues. Consequently, the replacement rate would be 64%—more than 22 points higher than in the 2021 report—and the generosity rate would be 53.7%. Nevertheless, the next Commission reports should confirm or refute whether the path is not as bad as the previous PP reform suggested.
In any case, what stands out is that the debate on these topics remains virtually silent. And that there is little discussion about how the miserable Spanish wages and lamentable labor market leave no alternative but to maintain a high level of pension spending relative to GDP. Because the other option would be to condemn the vast majority of future retirees to total poverty in the decades ahead. All of this is especially regrettable in a country where media noise is dominated by power plays, rather than focusing on the important issues. And one of the most important issues is that dismal wage structure in Spain—a labor market that, if applied to pensions as in other countries, would inevitably push future retirees into poverty.
