The elderly will have to work more and retire at 68 to pay for their pensions.

While all European countries struggle to mitigate the impact of aging on public finances, the difficulty is compounded in Spain. This is explained by the generosity of the Spanish pension system, with a higher replacement rate than the European one, and by the retirement of the baby boom generation, which in Spain is occurring almost a decade later than in the rest of Europe, meaning that the peak of pension spending will occur in 2045-2050.

Therefore, it is clear that demographics will exert significant pressure on public spending in Europe in general and in Spain in particular. Based on this situation, a study by CaixaBank Research, "Challenges and Policies in the Age of Longevity," warns that it is necessary to increase the employment rate among older workers and extend the legal retirement age to reduce the impact of aging on the economy. Two other levers that will need to be addressed are productivity and immigration.

The margin for correction has already been set by Airef. Public spending on aging in Spain will increase by more than five percentage points of GDP between 2022 and 2050. Of this increase, 3.4 percentage points correspond to pensions, while the increase in contributions remains at 1.1 percentage points. Therefore, the gap would amount to 2.3 percentage points of GDP, which requires action.

How can these effects be mitigated? The report proposes three levers. The main one is to intervene to extend working life. Initially, by increasing the employment rate of people between 55 and 74 years of age. This rate in Spain currently stands at 54%, and the target is for it to reach 70% by 2050. This is ten percentage points higher than currently projected. This would allow for a reduction in pension spending of 1.4 percentage points of GDP. In this regard, the incentives to delay retirement incorporated in the 2023 pension reform are useful, and "policies that further this path, such as allowing people to combine work and pensions, would contribute to further increasing the employment rate of these groups," the report states.

However, it's a very difficult goal to achieve. "It's very ambitious, yes, but in Germany the projected employment rate for that age group will be almost 65%. If Spain were to reach the German 65% instead of the 60% projected for Spain by 2050, pension spending could be reduced by 0.7 points of GDP, a substantial saving," says Javier García-Arenas, economist at CaixaBank Research and one of the authors of the report.

Another way to extend working life would be to raise the retirement age by linking it to increased longevity, so that in Spain it would rise from 66.2 years in 2022 to 68.2 years in 2050 (the baseline scenario is for it to remain at 67). This would mean a reduction of 0.5 percentage points of GDP in pension spending in 2050. "It could be a fairly automatic way to increase the employment rate among older people and relieve pressure on pension spending, but it is a far-reaching reform that would require broad political consensus," García-Arenas acknowledges.

The second lever that can be acted upon is increasing productivity, in which the application of AI can play a decisive role. It could contribute to a reduction in pension spending equivalent to one percentage point of GDP, although there is much uncertainty about the real impact of Artificial Intelligence.

Finally, the third point to address is immigration. It is estimated that a net immigration flow of 385,000 people per year between 2024 and 2050 would reduce this expenditure by 0.3 percentage points of GDP, thanks to greater economic growth. However, this increase in inflows is well above the Airef forecasts of 275,000 per year.

“It's a combination of three levers. It's like a chair: all the legs are important for it to stay in place. Given that neither immigration nor a surge in the birth rate alone seem capable of reversing the demographic transformation, it's essential to explore how the economy can adapt to the new population reality,” says García-Arenas.