Before leaving the Social Security portfolio and moving to Digital Transformation, Minister José Luis Escrivá launched his so-called ‘Escrivá reform’, which aims to delay the real retirement age and align it with the ordinary age as much as possible in order to build a sustainable pension system. In this way, Spaniards will be forced to increase their years of contribution, and therefore their productivity, if they want to have access to a decent pension as of 2024. It is now set at 66 years and six months.
This will especially affect workers of the ‘baby boom’ generation, i.e., those born between 1957 and 1977 who are now starting their retirement processes. The Government assures that Spain is one of the countries in Europe with the lowest employment rate for the elderly, making the pension system unsustainable.
The pension reform, approved in March by Escrivá, incorporates measures agreed with Brussels which seek to improve income from social contributions, but without rationalizing spending. The Intergenerational Equity Mechanism (MEI) will increase from 0.6% to 0.7% in 2024, establishing maximum contribution bases of around 5% and reaching salaries of 56,600 euros per year.
All this is included in the document ‘Projections of public spending on pensions’, within the Recovery, Transformation and Resilience Plan. The Government assures that it hopes not to have to activate the ‘corrective mechanism’, that is, the one that is applied if pension expenditure exceeds the initial planning. But to cope with this, workers will have to be more productive and increase their social contributions to be able to meet the pensions of the elderly.
Does Spain really lack productivity?
If we take a recent report by CaixaBank Research as a reference, we can see how productivity over the last 20 years has been more moderate. The average growth of the economy between 2014 and 2019 was 2.4% in real terms, with labor factor growth breaking down to 1.6%, capital factor growth to 0.5% and TFP to 0.3%.
Spain’s labor productivity growth between 2014 and 2022, in real terms, was 0.3% (lower than the 0.9% for the EU as a whole). In fact, in 2022, nominal GDP per hour worked in Spain was 76% of the value recorded in the Eurozone and 63% of Germany.
If we analyze the data with respect to the year 2000, there have been no major changes, as Spanish GDP per hour worked was 74% of the value of the Eurozone and 61% of Germany.
Productivity is also affected by the size of companies. The level is twice as high in the case of large companies, with the weight of SMEs in the Spanish economy being lower than in other countries. In Spain, 35% of employment is in companies with more than 50 employees, compared with 66% in Germany.
In fact, large companies tend to invest in intangible assets as a way of increasing productivity (management models and organizational efficiency, marketing, databases, software, etc.). Hence, the future of productivity in Spain lies in increasing investment in research and development, exceeding the current 1.3% of GDP, well below the 2% average for the Eurozone.
The active population of retirement age will triple by 2050.
All this will be a consequence of the increase in pensions for those who meet this requirement. Minister Escrivá calculated that nominal GDP would maintain an average growth rate of over 3% over the next few decades, i.e. 4.9% between 2023 and 2030, 4.1% between 2031 and 2040, 3.5% between 2041 and 2060 and 3.6% between 2061 and 2070.
In the case of real GDP, this will grow by 2% per year between now and 2050, i.e., above the 1.4% that has been growing over the last two decades and above the 1.13% set by the Independent Authority for Fiscal Responsibility (AIReF).
The unemployment rate is expected to fall from 11.6% to 5.5% in the period between 2050 and 2060. In this way, the prospects of the ‘Spain 2050′ foresight report presented in 2021, which projected an unemployment rate of 7% in 27 years’ time, will be surpassed.
The report shows an increase in productivity of 1.6% between 2041 and 2050, compared to 0.6% over the last two decades. Between 2023 and 2030, it is expected to increase by 1.2%, especially thanks to Next Generation funds, as digitalization will have a key impact on productivity.
Delayed retirement incentives
This new support package is expected to lengthen the careers of those aged 54 and over, and especially those aged 65 and over. However, the government will have to work hard to ensure that the employment rate of the population aged 65 to 74 triples between now and 2050. Its forecasts are for a rise from the current 7.6% to 28.3%. In the case of the 55-64 age bracket, it is expected to increase from 59.5% to 76% by 2050.
The age bracket is expected to increase to 16 million inhabitants by 2050, compared to the current 9.7 million people. In addition, the law has reduced employers’ social security contributions for temporary disability.
The fact that workers will increase their productivity and their years of contribution will reduce their years of retirement and peace of mind. However, they will be guaranteed an extra 4% in the regulatory base for each year worked after reaching retirement age. It will be a one-off payment for each year, increasing by 10% in the case of workers with 44 years and six months of contributions. In addition, they will be able to mix the lump sum and the regulatory base.
The Executive’s objective is really complicated, and implies a greater demand in terms of productivity for Spaniards. It means having to compensate the public coffers at the expense of a greater effort by our elders, largely due to inefficient management and lack of foresight.