The Bank of Spain has issued a warning about the challenge of pensions. The arrival of immigrants, increases in contributions, and incentives to delay retirement will not be enough on their own to address a problem of “extraordinary magnitude” and “one of the greatest challenges facing the major economies in the coming years”, according to their annual report published on Tuesday. In Spain, the aging population will be even more pronounced than in other countries, with a need for a drastic increase in the number of immigrants to maintain the current ratio between the working-age population and pensioners. The Bank of Spain questions the effectiveness of immigration in addressing the demographic challenge, as immigrants do not possess the same level of education as native-born individuals and may not be able to meet the future needs of the labor market due to technological changes.
The Bank of Spain also raises doubts about the projections of the Government and the European Commission regarding pensions. They point out that pension payouts have always exceeded forecasts and have had to be continually revised upwards. The Bank of Spain questions the effectiveness of one of the main cost-saving measures proposed by the Government and accepted by Brussels: incentives to delay retirement voluntarily. While the Government predicts a significant reduction in pension spending by 2050 due to workers delaying retirement, the Bank of Spain casts doubt on the savings that can be achieved through this measure. They suggest that the actual savings may be much lower than predicted, as the additional pension benefits provided to those who delay retirement may offset the initial savings from the delay.
The Bank of Spain also warns against increasing social security contributions to address the pension shortfall, as this could have negative effects on employment, economic competitiveness, and intergenerational equity. Instead, they propose alternative measures such as evaluating replacement rates, which determine the percentage of a worker’s salary that is received as a pension. Reducing replacement rates could lead to lower initial pensions but may contribute to the sustainability of the pension system. The Bank of Spain also calls for an examination of private savings and their potential to supplement public pension benefits.
The Bank of Spain highlights the impact of inflation on public revenue, attributing a significant portion of increased income tax revenues to the failure to update tax brackets accordingly. This has led to higher average tax rates for individuals, particularly affecting higher income earners. Although higher income individuals contribute a significant portion of income tax revenue, the Bank of Spain points out that the widening deficit in public accounts is primarily due to increased pension spending and higher public consumption. The institution estimates that significant fiscal adjustments will be required annually in accordance with new European fiscal rules, which may impact economic growth.
The Bank of Spain emphasizes the need for a reorganization of revenue and expenditure to improve efficiency and quality, particularly through a restructuring of the tax system to support economic growth. They stress the importance of placing greater emphasis on consumption taxes and environmental taxes, which are less distorting to economic activity compared to direct taxes such as income and corporate taxes. The institution warns that the current fiscal challenges will require significant structural adjustments, which may impact economic growth in the coming years.
