The Spanish government has successfully navigated a critical evaluation by the Independent Authority for Fiscal Responsibility (AIReF), resulting in the avoidance of automatic adjustments mandated by law.

The AIReF announced preliminary results on Monday concerning pension sustainability, which will undergo updates every three years.

According to the authority's calculations, the average pension expenditure, after accounting for government measures, is projected to reach 13.2% of GDP, marginally below the legally mandated threshold of 13.3%.

Additionally, a longer-term forecast estimates that average pension spending could rise to 14.6% of GDP by 2050, under the legal cap of 15%.

However, the AIReF determined that anticipated revenue measures would yield an additional collection of only 1.4% of GDP annually until 2050, falling short of the 1.7% target established by law.

Despite this shortfall, compliance with the first two benchmarks allows Spain to pass the review process.

The positive outcome is attributed in part to a recent upward revision of GDP figures by the National Statistics Institute (INE), indicating a 6% increase since 2020. This revision has effectively lowered the spending baseline for pension expenditure in 2022 and 2023, making it 0.7 percentage points lower than it would have been without such adjustments.

Nonetheless, this improved baseline does not necessarily indicate a more sustainable future for the pension system, as recent pension reforms have been criticized for potentially aggravating expenditure dynamics in subsequent decades.

AIReF President Cristina Herrero expressed concern over the limitations inherent in the review process, noting that the authority is constrained by statutory obligations to utilize projections from the Ageing Report, jointly prepared by the Ministry of Economy and the European Commission, for expenditure calculations.

These limitations hinder the AIReF's independence and analytical capacity.

As a result, the AIReF has conducted its own estimations, warning that projected future spending could be worse than previously anticipated.

In 2022, the authority estimated that spending would increase by 3 percentage points of GDP by 2050; it now anticipates a 3.4-point rise, amounting to an approximate €6.5 billion difference at current prices.

The AIReF further cautions that the financial situation of the Social Security system will continue to deteriorate over time.

The reforms enacted under former Minister José Luis Escrivá, applicable to pension revaluation linked to inflation, are projected to raise costs by 2.7 percentage points of GDP by 2050. In contrast, revenue measures from these reforms are only expected to generate an increase of 1.4 percentage points of GDP.

This shift invites scrutiny as the reforms enhance the return rate on contributions for retirees upon retirement.

The return rate, already favorable, has increased from 5.2% to 5.7%, allowing pensioners to receive approximately 30% more than they contributed.

Additionally, the elimination of the sustainability factor has quadrupled the generosity rate of pensions, currently at 13.6%.

The AIReF's findings underscore that only parameters introduced by the government, combined with the GDP revision, have prevented a negative assessment.

The authority calls for a comprehensive long-term fiscal plan from the government to rectify public finance imbalances, asserting that the passing grade is illusory.

The double pension reform initiated under the current administration has not improved the system’s sustainability, which, according to AIReF forecasts, could push pension spending to 16.1% of GDP by 2050, up from 12.9% in 2023.

While Spain's successful evaluation allows it to evade automatic adjustments agreed upon with the European Commission, the AIReF warns that future public spending adjustments will be necessary to adhere to fiscal regulations.

Pension expenses are projected to rise by an average of 4.5% annually over the next decade, while the overall public spending growth limit stipulated by Brussels is restricted to 3%.

This discrepancy suggests that significant future adjustments in public administration will be required, either through spending cuts or tax increases, to meet pension obligations alongside fiscal commitments.

Failure to make appropriate adjustments could see the national public deficit escalate from the current 2.8% to 7% by 2050, indicating a rapid deterioration of the budgetary situation without corrective intervention.

The Ministry of Social Security, under Elma Saiz, has expressed satisfaction with the AIReF’s assessment, confident in the efficacy of recent policy measures.

However, the AIReF maintains that both long-term spending and revenue projections have suffered from government reforms.

Meanwhile, Social Security sources contend that the authority has adopted a conservative stance regarding the impacts of labor reforms and minimum wage increases on social contributions.