You contribute more, you earn less: the generational toll of pensions

Since Felipe González's government implemented the first pension reform in Spain in 1985, every executive has sought the magic formula to preserve the pay-as-you-go system and balance Social Security finances. However, in 40 years, no one has managed to find the right solution to stabilize the system's finances, strained by payments, low birth rates, and an aging society that is knocking on the door en masse. The baby boom generation began retiring in 2023 and will continue its arrival without pause, testing the seams of public finances.

Whether harsh or less harsh, the reality today is that Social Security spending exceeds 200 billion euros and the system has a deficit exceeding 126 billion euros, a bill that will be passed on to future generations. Social Security's deficit is growing irrevocably. In recent years, revenue growth has been historic due to factors such as job creation and rising salaries, but above all due to the spiraling rise in contributions, a path opted for by the pension reform designed by former minister José Luis Escrivá . Today, people pay more and the demands for collecting pensions are greater, but spending is rampant: it has gone from representing less than 1% of GDP in 1977 to 12.6% today.

The surge in revenue continues to prove insufficient to contain the pension deficit due to the massive spending, which has skyrocketed since 2019 due to the indexation of payrolls to the CPI and the arrival of the boomers. All of these factors have increased disbursements by more than 40% in just six years.

"The pension system continues to accumulate long-term tensions despite the reforms adopted in recent decades, and the measures implemented since the 1980s may have served to guarantee immediate stability, but at the cost of toughening access conditions and shifting a significant part of the burden to new generations," states a study by the Ruth Richardson Center at the University of the Hesperides in its conclusions.

The report warns that successive adjustments have prioritized short-term financial balance without addressing the structural causes that threaten the future sustainability of the model, particularly the aging of the population and the sustained decline in the ratio of contributors to pensioners. It also questions the effectiveness of the latest reforms in addressing the impact of the retirement of the baby boom generation.

The work, which is the first in a series of five reports on this issue, identifies an initial phase of progressive hardening in the evolution of the reforms (1985-2013), with significant changes, such as the increase in the years required to access a full pension from 10 to 15 years approved by the first socialist government or the regulation that included the recommendations of the Toledo Pact in 1997, with measures that led to a reduction in future amounts after extending the calculation period from 8 to 15 years.

The retirement age was raised to 67 and the calculation period was extended to 25 years under the government of José Luis Rodríguez Zapatero. Mariano Rajoy's government also introduced automatic adjustment formulas, such as the pension revaluation index (IRP), which limited pension increases to 0.25% during times of systemic crisis, and the sustainability factor, which decoupled pension revaluations from the CPI and linked them to life expectancy.

The reforms

These latter reforms were reversed by the Pedro Sánchez administration, which once again linked salaries to price trends and eliminated the sustainability factor. At the same time, a spiral of tax and contribution increases was set in motion. This is the case with the intergenerational equity mechanism (MEI) , a contribution surcharge, which was accompanied by an increase in the maximum pension bases, in addition to the removal of the maximum pension cap. Since this year, a "solidarity quota" has been in effect to pay pensions for those earning more than €59,000.

Although these measures have enjoyed broad political support, the report warns that they are based on optimistic projections of employment and economic growth, without addressing underlying demographic trends. "The MEI and the increase in contributions have functioned more as accounting solutions than structural reforms , so the system faces its greatest challenge with the mass retirement of the generation born between the 1950s and 1970s, which will further strain the current model," the report states.

The MEI was heavily criticized by the academic world, which rejected Escrivá's contribution increase, arguing that it would not improve sustainability and would worsen intergenerational equity. One of the main sources of conflict is the added burden that younger generations , already punished by wage insecurity and unemployment, will bear in facing the years of financial strain the system will face due to the retirement of the baby boomers.