Is the pension system sustainable?

If you belong to the Baby Boom generation and were told you would never collect your pension, you can now breathe easy. In 2021 and 2023, Parliament approved the pension system reform. It did so with the usual political backing and that of the trade unions. The employers' association raised a storm of protest and did not join the agreement. Understandably so, since businesses will bear roughly five-sixths of the effort, while workers will take on one-sixth. In any case, it is worth highlighting that Brussels accepted the reform, which allowed Spain to keep receiving the committed Next Generation funds.

Now, with elections called for November, a dreaded debate has resurfaced: is our pension system "bursting at the seams"?

Raising revenue before cutting spending

Let's take it step by step. In 2022 the easiest part was approved: indexing benefits to the CPI and supporting longer working lives through various measures. It was obvious that a sidelong glance at the population pyramid was enough to see that, given the pace at which the number of retirees would rise until 2050 and the level of wages of the young people entering the labour market, keeping the pension system as it stands was impossible.

What remained to be seen was how to bell the cat in the second part of the reform, which was due to be ready by the end of 2022.

In the end, since the only thing that works is back-of-the-envelope arithmetic, they found that either revenue had to rise or spending had to fall. The Spanish government, in an election year, preferred to increase revenue. Cutting spending, therefore, took a back seat.

The three new sources of revenue

We now find that the improvement in the system's revenue will fall, basically, on salaries above the maximum contribution base and on businesses.

As a result, there are three additional sources of revenue:

• The increase in the maximum contribution base (known as the "destope", or lifting of the cap).
• The solidarity contribution, which progressively taxes the portion of salary exceeding the maximum contribution base.
• The Intergenerational Equity mechanism.

We highlight this last factor, which replaces the solidarity factor of the 2011/2013 proposal and will seek to rebuild the Reserve Fund at a cost that will reach 1.2 % of salary, with the employer paying 1 % and the worker 0.2 %.

In addition to these adjustments, the aim is to narrow the gender gap by raising minimum pensions and improving contributions for irregular careers, the so-called 'gaps', in which, for various reasons, it was not possible to work.

How pensions will be calculated: the shock, postponed to 2044

A new calculation mechanism was also established. Under it, the number of years used to calculate the pension rises to 29, although the two worst years are discarded.

The intention is for this method to coexist with the current one, that is, the last 25 years, until 2044. After that, only the 29-year method will remain.

Until then, pensioners will be paid under whichever method is more favourable, so the shock of the increase is postponed to 2044, by which time a good part of those born during the baby boom are expected to have been kind enough to pass away.

The numbers behind the demographic challenge

To grasp the scale of the problem, it helps to look at the figures. With data as of September 2026, there are almost 22.5 million contributors and almost 10 million pensioners, of whom 6.5 million receive retirement pensions, 2.4 million widow's pensions, and the rest orphan's pensions and other social circumstances.

However, the problem emerges as those of us born in the so-called "baby boom" retire. Various projections from the INE and AIReF tend to agree on a population in 2050 with around 3 million more inhabitants, mostly immigrants, but 6 million more retirees, which already gives an idea of how hard it will be to finance the system as it stands. This means that, if we currently have roughly 2.7 contributors per pensioner, this ratio will fall to 1.5.

Another way to look at it is to compare pension payments with GDP, which will necessarily rise from the current 13 % to 16 %, while the pension system's deficit, which must be covered by contributions from the State out of the general budget, climbs to 70 billion euros per year.

It is obvious that, if we wanted to balance the pension system without additional State contributions, we would not just have to freeze pensions but cut them. In fact, the 2013 study by "the 12 wise men" already proposed not indexing pensions to the CPI, but instead adjusting the initial pension at each point in time to life expectancy, introducing an adjustment mechanism to calculate pensions based on activity and on the amounts contributed by active workers.

And, as you will surely have guessed, long-suffering reader, they were never put into practice and were repealed in 2021.

Is the system sustainable? Between alarmism and nuance

For all these reasons, the most alarmist voices say the system is unsustainable, especially if pensions continue to rise with the CPI. Given that the average pension is 1,552 euros, that new pensioners will receive higher pensions, and that new contributors, especially young people, earn salaries close to the minimum wage, which stands at 17,000 euros a year, it is easy to conclude that the deficit can do nothing but grow.

However, the latest reforms this very year, which seek to delay the retirement age and add to those made in previous years, are making the average retirement age already exceed 65 (if conditions are favourable and health and work allow it).

A light at the end of the tunnel?

It is expected that, from 2060, the strains on the pension system may ease as the number of retirees potentially declines, as the population pyramid indicates. It is also to be hoped that productivity improvements, perhaps through the use of AI, will allow us to maintain our welfare state as we have known it until now.

So, what can ordinary citizens do? Unfortunately, it seems that there is no alternative but to save for retirement, since it is foreseeable that the ratio between the first pension received and the last salary earned will fall from the current 80 % to perhaps 60 or 65 %, which would be the EU benchmark. This amounts to a significant loss of purchasing power at the moment of retirement.

For all these reasons, I believe the creation of company pension plans should be encouraged, especially for SMEs and the self-employed. Although, and this should not be lost sight of, given the financial efforts businesses will have to make to fund the additional revenue foreseen under the reform, it may be hard for these plans to materialise: they may well end up being simply a higher personnel cost.

Conclusion: the underlying question is generational

It is clear to us that the extraordinary contributions the State will have to make will not decline in the coming decades. Not until the population pyramid gives us a breather.

In the meantime, maximum relaxation: no political party will dare to punish pensioners.

It would not be surprising, however, if young people, who are the most affected by the current system (since the pay-as-you-go system now in force, into which they contribute today, pays the retiree's pension but not their own), were to rebel. At bottom, what ought to be considered is the transfer of wealth between generations. But that would be getting myself into a mess I would struggle to get out of.