Spain, like many other countries, has an ageing population.
Spain’s highly contentious new state pension reforms have now come into effect. The modifications restrict how much payouts can rise and introduce annual increases to the statutory retirement age.
From the 1st January 2014, pensions increases are no longer pegged with inflation. From now on, they will rise by a minimum of 0.25 per cent each year and will only go up further than this if the country’s social security system is in a surplus situation. The increments will be capped at 0.5 per cent above the rate of inflation.
On this basis, it is widely expected that this year pensions will rise by the fixed minimum - 0.25 per cent - owing to the state’s delicate financial situation. This means that should 2014 end with inflation at one per cent, as the government forecasts, Spain’s nine million retirees in receipt of the state pension will find that their spending power will fall by 0.75 per cent. Reversely, should it remain at 0.2 per cent, they will gain 0.05 per cent in real terms.
From 2019 onwards state pensions are to be calculated using a so-called ‘sustainability formula’ that ties payouts with life expectancy, resulting in pensions payments falling as life expectancy increases.
In 2027 the pensionable age will be increased to 67 and will then subsequently increase progressively every year. The idea is that people will have contributed for a minimum of 25 years before drawing a state pension.
The government says that these measures will ensure the strained pension system’s financial viability for generations to come. It claims that “action is needed” because of a fundamental shift in demographics - namely that Spain, like many other Western countries including the UK and Holland, has an ageing population.
Research by the University of Navarra’s IESE Business School reveals that in 2010 there were 3.6 potential paying contributors to every pensioner. Should the current trend continue as it is now, the ratio will plummet to 2.5 by 2030 and 1.6 by 2050.
“To continue to fund its pensions, Spain will need 26.5 million immigrants over the next 40 years, or roughly 665,000 per year. But only 70,000 immigrants arrived in 2010,” reads the report.
In its recent assessment on the reforms, Fedea, the Foundation for the Study of Applied Economics, a Madrid-based think tank, broadly welcomed the changes as “the sustainability of the system is guaranteed”. However, it also concluded that governments in the future are likely to have to take steps to prevent living standards from falling amongst retirees as a result of the changes.
Similar conclusions have also been reached by the Organisation for Economic Cooperation and Development (OECD), the influential international economic organisation founded in 1961 to stimulate economic progress and global trade agreements. In its report the OECD wrote that the new system “increases the uncertainty for future retirees regarding their pension entitlements” and called for “careful monitoring of pensioner poverty.”
It did also stress, however, that the state pension in Spain is one of the developed world’s most generous. The average Spanish pensioner receives 74 per cent of his or her pre-retirement salary, compared to the OECD area (consisting of 34 countries) average of 55 per cent.
Spain’s pension reforms that came into force on New Year’s Day are a major component of Mariano Rajoy’s centre-right government’s wider structural reforms, demanded by the European authorities, which have included a radical shake-up of the labour market and come ahead of the scheduled overhaul of the country’s tax system later this year.
The latest changes to the state pension system have been met with fury by many of the foreign residents who draw, or who will do so in the near future, a pension in Spain. One reader of this newspaper who declined to be named says: “They keep moving the goalposts. I’m going to start claiming now before the money runs out more than it already has done.”
Another, San Roque resident Kathy Torres, comments: “Making millions of pensioners, who are forming a larger and larger proportion of the population, poorer over time, is not the answer. These people’s acquisition power should, if anything, be increased in order to help the wider economy, especially when youth unemployment is so high.”
Whilst Dennis Smythe, who lives in Benalmádena, adds: “Many pensioners in Spain, as far as I can see, are already living on or below the poverty line - for many reasons including that they are having to support children and grandchildren financially because of the crisis. Capping pensions will exacerbate the problem.
“If you limit and cut back on pensions when the number of pensioners is rising you will push more and more into poverty.”