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The future of Spanish pensions*

Dã Az-Gimã‰nez, Javier and Juliã N Dã Az-Saavedra
Authors registered in the RePEc Author Service: Julián Díaz-Saavedra () and Javier Díaz-Giménez ()

Journal of Pension Economics and Finance, 2017, vol. 16, issue 2, 233-265

Abstract: We use an overlapping generations model economy with endogenous retirement to study the 2011 and 2013 reforms of the Spanish public pension system. These reforms delay the legal retirement ages, increase the contributivity of the system, and adopt a sustainability factor and a pension revualuation index that effectively transform the Spanish pension system into a defined-contribution pension system. We find that these reforms improve the sustainability of Spanish pensions substantially, and that they limit the tax increases that would have been necessary to finance the pension system deficits. But these results are achieved at the expense of large reductions in the real value of the average pension. This reduction is progressive and, by 2050, the average pension is approximately 30% smaller in real terms than what it would have been under the pension system rules that prevailed in 2010. We also show that these reforms are costly in welfare terms and that households born between 1950 and 1970, young disabled workers who are alive at the time of the reform, and future cohorts bear the highest welfare costs. The substantial reduction of pensions and the high welfare costs that these reforms bring about lead us to conjecture that further reforms lurk in the future of Spanish pensions.

Date: 2017
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Working Paper: The Future of Spanish Pensions (2014) Downloads
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