Spain's pensions hit 170.800m as baby boom retirement surge begins

Baby boom retirement now strains pensions with 170.800 million in costs

How long can a system withstand its largest spending increase just as the bulk of baby boom retirements begin? In 2023, payments for contributory and non-contributory pensions reached 170.800 million euros, around 12.7% of GDP, and Funcas selected it as the data of the year. These are 15.800 million more than in 2022, the largest annual increase in history and triple the pace recorded over the last fifteen years. The striking fact is not the figure. The striking fact is that the baby boom has only just begun to retire.

Why pension spending rose 8.4% in one year

The jump responds to three drivers. The first, the revaluation of benefits by 8.4% in line with the previous year's inflation. The second, the so-called substitution effect: new recipients enter the system with higher salaries than those leaving it. The third, the constant trickle of new pensioners, 109.000 more in one year.

The average pension is now at 1.197 euros, compared to 1,094 twelve months ago. The retirement pension, at 1,377 euros, is 117 higher. For 2024, the agreed revaluation is 3.8%, which will add around 6.500 million on its own. Add the rest of the factors and total spending could climb to 180.000 million: almost 6% more in a year where GDP will barely grow 2%. The bill advances three times faster than the economy supporting it.

As a reference, health and education together cost 144.000 million in 2021, the last year with closed data. Pensions alone now weigh more.

How many baby boomers will retire and what happens to the active population

Here comes the underlying problem. INE demographic projections place the loss of working-age population at more than 800.000 people between 2023 and 2050, while the group over 65 will grow by more than 6 million. In 2030 almost 4 million baby boomers will be receiving a pension; in 2040 there will be over eleven.

CaixaBank Research summarized it without much adornment: Spain enters a historical stage in which the first waves of the baby boom retire and the subsequent ones will do so over the next seventeen years. The pay-as-you-go system — today's contributors pay today's pension — is thus subjected to its particular stress test.

Possible exits: cuts, more contributions or more taxes

The range is short and no path is comfortable. Cutting benefits is unlikely due to the growing weight of voters over 65. Raising social contributions or taxes, or a mix of both, is the path already hinted at with figures like the Intergenerational Equity Mechanism. Public debt remains, but the high starting level almost completely rules it out.

On the table are proposals that go further: raising early retirement to 65 and ordinary retirement to 68, requiring 42 years of contributions to receive 100%, or allowing the choice of the 40 best years of working life. The most pessimistic calculation assumes the adjustment will arrive anyway, late and all at once.

Intergenerational scam or State guarantee?

Here the analysis splits into two. For one current, the system is a transfer from young people who have nothing to older people who already have everything, and current pensions are sustained by drawing on debt. At the extreme of pessimism, the design is compared to a Ponzi scheme. Opposite, the opposing view: the public pension will not collapse because it is supported by an obligatory tax and GDP, while private plans depend on investment risk and managers who may do it wrong.

The uncomfortable part is that both currents share a diagnosis: the system was never self-sufficient. Money was taken from it for other items, and its accounting has always been mixed with that of the rest of the State.

A labor market that does not match unemployment

While discussing how to pay for pensions, the labor market sends contradictory signals. Resignations exceeded for the first time the average of 11.000 daily, and 75% correspond to workers with indefinite contracts. These are 8.400 resignations on average, 26% more than a year ago and well above those recorded before the pandemic. In parallel, the real retirement age scales to 65.1 years and deferred retirement grows 50% during 2023.

It does not fit entirely: the country with the highest unemployment rate in the European Union records at the same time a record number of resignations and delayed exit from the labor market.

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The figures serve, at least, to order the scare. A system that grows at 6% with GDP at 2% does not need enemies. It needs time, and the calendar is the only thing that does not allow renegotiation. There remains a comfortable exit that no one has discarded: pay it and look the other way. It works marvelously until it stops working.