The Spanish government has successfully evaded pension adjustments by incorporating state transfers to the Social Security system, according to the latest report released by the Independent Authority for Fiscal Responsibility (AIReF).

This report indicates that corrective measures are not currently needed; however, the AIReF has raised alarms regarding the deterioration of pension sustainability.

It projects that pension-related expenditures will escalate by 3.4 percentage points of GDP by 2050, exceeding previous estimates by four-tenths, despite improvements in the economy.

To achieve a balanced system, an estimated 2.4 percentage points of GDP in additional revenues, approximately €38 billion at current GDP levels, will be required, alongside the already established 3.7 percentage points that the state contributes through transfers, pensions, and loans.

This projection assumes that contributions will increase by 1 percentage point of GDP due to recently approved measures.

Furthermore, the AIReF noted "significant methodological weaknesses" in the current review, arguing that it is influenced by economic growth rates that are currently overstated, showing excessive sensitivity to fluctuations, and providing a partial view of sustainability.

Cristina Herrero, the AIReF president, highlighted these concerns, stating that the review lacks reliability as an indicator of sustainability.

The report also indicates that Spain's economy is vulnerable, with public debt projected to reach 129% of GDP by 2050 and 181% by 2070 under constant policies without a new fiscal plan.

Herrero emphasized that due to the need to allocate an additional 3.4 percentage points of GDP for pensions, resources would consequently have to be withdrawn from other sectors.

There is an impending necessity for an accumulated adjustment of 3.16 percentage points of GDP until 2040 to place debt on a declining trajectory concerning GDP. The AIReF forecasts that pension expenditure will rise at an average of over 4% annually, whereas the commitment is for total spending not to exceed a 3% growth rate, indicating that measures will be required to mitigate this discrepancy.

To finance an increase in defense budgets, further adjustments might also be necessary.

Despite these warnings, the AIReF confirmed that under its findings, the pension examination would not have yielded an adjustment, primarily due to a favorable economic landscape.

The agency reported that the pace of expenditure is accelerating, thereby worsening sustainability forecasts.

The European Commission has expressed skepticism about the pension reforms enacted between 2021 and 2023, stipulating a review every three years to assess updated projections from 2022 to 2050, beginning in 2025. This evaluation considers an aging report generated by the Commission and incomes projected by the AIReF, with a combined expenditure limit of 13.3% of GDP once income measures are removed.

Data indicates a fiscal gap of approximately 0.8% of GDP (around €12 billion), which would require legislative measures to address.

Absent a parliamentary agreement, automatic contribution increases could occur, countering political risks associated with portraying inadequacy and potential employment impacts.

The government aims to avert such contributions increases, which could convey an impression of insufficiency.

Recent regulations have been instituted detailing how this examination should progress, incorporating state transfers to Social Security initiated in 2021, amounting to nearly €20 billion, which helped reduce the pension deficit from about 1.5% of GDP to the current rate of 0.6%.

Experts criticize the government's reuse of these transfers in calculations as double counting.

Moreover, the government’s decree stipulated considering future indirect income-boosting measures, including labor reform, minimum wage increases, and addressing the informal economy.

Despite higher-than-expected GDP expenditures in recent years, updated GDP projections have provided an improvement of seven-tenths of GDP, which rises to eight-tenths with anticipated future growth.

For state transfers, the AIReF only considers three-tenths associated directly with pensions to reinforce income.

This results in a total estimated contribution of 1.4 percentage points of GDP, identifying measures that include various contributions intended to strengthen the pension system.

AIReF forecasts a demographic decline leading to an increased dependency ratio, projected to fall from 3.8 working-age individuals per pensioner to 2.1 by 2050. This demographic shift suggests a potential need for one million immigrants annually to offset the decline, a figure that has not been achieved historically.

Consequently, the long-term economic growth potential is anticipated to diminish to approximately 1.3% annually.

In terms of fiscal implications, the AIReF’s calculations suggest that pension expenditure will elevate, yielding an average increase to 14.4% of GDP from 2022 to 2050, slightly lower than the Commission's estimate of 14.6%.

The peak pension spending in 2050 is expected to reach 16.1% according to the AIReF and 16.4% as per the European Commission.

Both projections incorporate significant intended savings from planned delays in retirement by a substantial portion of the workforce, although there are contrasting views on the actual realization of these savings.