Spain to raise social security payments to fund pensions

MADRID: Spain’s government said Tuesday it had reached an agreement with unions to raise social security contributions to help finance its public pension system which is struggling with a rapidly ageing population.

The European Commission has long demanded that Spain reform its pensions system and has made it a condition to access billions of euros in economic recovery funds.

Socialist Prime Minister Pedro Sanchez said the agreement would help “ensure the sustainability of the public pension system” but many economists warned it does not go far enough.

Under the agreement reached with Spain’s two biggest unions, the CCOO and UGT, after weeks of talks, social security contributions will rise by 0.6 percentage point between 2023 and 2032. The amount of the increase will be revised after 2032.

Employers will cover 80 percent of the increase and workers the remaining 20 percent.

Spain’s main business associations abandoned the three-way talks with the government and unions, arguing the plan would hurt job creation as it put too much of the burden on employers.

The government ruled out other options such as increasing the retirement age or lowering monthly pension payments.

The country’s pension system is under strain from the upcoming retirement of its large baby-boom generation — those born in the 1960s and 1970s, later than in other countries — over the next two decades.

Demographics complicate the picture.

Spain has one of the world’s longest life expectancies — around 83 years according to the World Health Organization — and Europe’s lowest fertility rate after Malta’s.

“The new mechanism will not improve either the sustainability or the equity of the pension system,” the research department of Spain’s second-largest bank BBVA said in a report.

The higher social security payments will “pass on a large part of the burden of expenditure onto younger generations,” it added.