The Bank of Spain has issued a warning about the potential negative consequences of solely relying on increased contributions to finance the expected rise in public spending on pensions in the coming years. According to the banking supervisor’s annual report, this approach could harm employment and Spain’s overall competitiveness. The report focuses on the country’s structural challenges and highlights the significant challenge of the imminent retirement of the baby boom generation, which will lead to a substantial increase in retirement benefit expenditures. The pension reform implemented last year has further accentuated this situation.

To address this increase in pension spending, the government has proposed a progressive increase in social contributions, particularly for salaries exceeding 50,000 euros. However, in case spending exceeds 13.3% of GDP, the government will be compelled to implement additional measures to reduce spending or bolster income, a decision that will be based on the forthcoming Airef report next year. If no agreement is reached, an automatic clause will come into effect, resulting in even higher contributions to offset the expenditure increase.

However, the Bank of Spain highlights the potential drawbacks of relying solely on increased social contributions for pension system financing. According to their estimates, for every percentage point increase in the average social contribution rate, employment could decline by 0.25% after four years. In practical terms, a 1% increase in contributions would lead to the loss of approximately 50,000 jobs within the same timeframe.

Under the full implementation of the pension reform, the Airef predicts a 2.7-point rise in the average contribution rate. In numerical terms, this would result in a loss of 135,000 jobs within four years. Nevertheless, the fiscal supervisor notes that the impact would be uneven and primarily affect higher salaries.

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