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Migrant workers at a construction site in Madrid. O. Chamorro
Spain needs 25 million migrants of working age to prop up pensions, bank claims
Economy

Spain needs 25 million migrants of working age to prop up pensions, bank claims

The Bank of Spain has highlighted the the problem of the ageing population and the sharp drop in the country's mortality rate in its latest report

Edurne Martínez

Madrid

Wednesday, 1 May 2024, 10:39

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One of the most difficult challenges for the Spanish economy in the short and long term is population ageing. The fall in the country's birth rate is obvious, but the Bank of Spain also highlights in its report the sharp drop in Spain's mortality rate, two things that will intensify in the coming decades and will be a more pronounced problem than in other neighbouring countries, the organisation said in its new annual report published on Tuesday 30 April.

In the next 30 years, the dependency rate - the ratio between the over 66s and the 16-66 age group - in Spain will increase by 27 percentage points to 54%, while in the European Union (EU) this rate will increase by only 16 points to 46%, well below the Spanish rate.

The Bank of Spain's prediction is simple on paper, but complicated in practice: promote working longer, undertake "without delay" an "ambitious" financial consolidation process with a medium-term perspective so the public pension system is sustainable, and analyse whether public actions to reconcile family and work are helping to increase the birth rate. But it is still not guaranteed the system will stabilise.

Although the Bank of Spain details that migration has picked up in recent years, "it does not seem likely this will prevent the process of population ageing in which our country is immersed", nor "resolve the imbalances that could arise in the labour market in the future". In fact, according to estimates, some 10 million foreign-born people of working age will arrive in Spain over the next 30 years, but this is still not enough to keep the dependency rate in Spain at current levels.

The Bank of Spain calculates this volume of arrivals would have to be "three times higher" between now and 2053 in order to keep the rate stable. They pointed out that for the dependency ratio to remain at 26.6% as it is now, a working-age group of almost 56 million people would be needed. And, according to the INE national institute of statistics estimates of the national and foreign population at that date, the Bank of Spain's calculations show 24.7 million more working-age migrants will be needed in 2053. The financial institute clarifies this figure does not correspond to the number of migrants that should arrive in Spain, but "by how much the stock should have increased by that date".

Pension expenditure is expected to continue an upward trend in the coming decades. In the last decade, pension outlays increased by 1.1 points of GDP to 13% in 2022, while the number of benefits has grown by just over a million. The Escrivá pension reform incorporated future spending obligations "that we do not see will be compensated on the revenue side", said Ángel Gavilán, director of economics and statistics at the Bank of Spain during the presentation of the report, who predicts additional measures will need to be taken.

Delaying retirement is not enough

According to the Bank of Spain, in 2023 there were a total of 26,000 delayed retirements, some 50% more than in 2022, but still only 8% of the total. It called for "further analysis of the effect of incentives to postpone retirement age". The Bank of Spain set out a series of calculation scenarios where it warned even if there were a very high volume of people delaying retirement, the effect on the system's expenditure would be "very limited", so "further measures" need to be looked at.

Pension savings

0.6 tenths of GDP

Each year of increase in the effective retirement age leads to a decrease in pension expenditure of between two and six tenths of GDP.

In the best-case scenario - if 100% of workers were to retire with a three-year delay, i.e. at the age of 70 - the savings for the pension system in 2050 would be one percentage point. An "insufficient" amount to correct the high spending obligations acquired with the pension reform of former minister José Luis Escrivá between 2021 and 2023, according to Gavilán.

"Even in scenarios where the new bonuses have a notable effect on increasing the effective retirement age, the reduction in pension expenditure would be relatively limited," according to the Bank of Spain. According to its calculations, each year of increase in the effective retirement age would be associated with a decrease in pension expenditure of between two and six tenths of GDP.

Rising prices, job cuts

The pension reform is due to be assessed in 2025 through the so-called safeguard clause. This clause stipulates that if the projection of average pension expenditure in the period 2022-2050 deviates from 13.3% of GDP, the government must take measures to correct it, which could come into force from 2026. And if none are agreed, there would be an automatic increase in social security contributions in 2026.

The problem is that this increase in social security contributions will have implications on employment. The Bank of Spain's simulation exercises show a direct relationship between contribution rates and labour market developments. Specifically, the results suggest an increase of one percentage point in the average effective rate would, after four years, generate a fall in the number of employed people of around 0.25%, or some 50,000 jobs.

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