The Impact of Economic Crisis on Pensions Systems: A Reform Towards Shrinking and Devaluing Pensions in Spain?

This paper examines the impact that the economic crisis has had on pension systems and how it has influenced the development of pension policies in the European Union, and particularly in Spain. It is divided into two parts.

 The first part of this proposal focuses on the two main challenges currently faced by pension systems in Europe. On the one hand, the threat of ageing populations caused by the demographic change that is transforming the European society’s structure, basically due to a raising life expectancy and the retirement of the baby boom generation. And, on the other hand, the relevant implications for the long-term sustainability of public finances that this coming population structure is bringing along in a context of fiscal consolidation.

 Both factors have contributed to speeding up the process of pension reform that originally started a long decade ago, and that has now gained intensity specifically in those countries hardest hit by the economic crisis. From this perspective, the paper analyses the major trends in reforms outlined by the European Commission in its White Paper (2012) “An agenda for adequate safe and sustainable pensions”: one, balancing the time spent in work and retirement through the strengthening of contributory principles (i.e. increasing pension eligibility age or contribution period); and, two, developing complementary private retirement savings as a key element of a (new) multi-pillar pension system.

 Secondly, this paper specifically  deals with the latest pension reform trajectory in Spain. As a starting point, it assesses the current financial difficulties that the Spanish Social Security (public pension system included) has gone –and still is going–through, in order to clarify to what extent those tensions are due to real structural problems –a raising dependency ratio linked to an ageing society– or ‘just’ to a critical juncture caused by the economic crisis and the dramatic loss of jobs. Then my attention is drawn to the legal changes introduced in the Spanish pension system in recent years: 2011 and 2013.

 A brief reference is made to the 2011 reform that brings about parametric measures aimed at guaranteeing the financial sustainability at the expense of the pension system’s generosity (i.e. replacement rate). Thus, the paper concentrates on the 2013 legal reform (Law 23/2013, of December 23) whereby two important provisions are introduced: one, a new index for pension revaluation –a complex adjustment pension formula delinked from any standard of living indicator– and two, a new sustainability factor –that links the initial amount of retirement pension to changes in life expectancy–. These two measures are critically examined from a legal and constitutional perspective in order to determine whether they are just further adjustments to the previous (2011) pension reform; or, on the contrary, whether they are to be considered major changes that entail a model’s switch to shrinking and devaluing (public) pensions, and a new open space for private pension development.