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Spain: Pension Indexation Reduces Fiscal Flexibility

This commentary explores the Spanish pensions system and the implications of pensions automatic indexation to inflation. The sheer magnitude of pension expenditure renders its evolution key to understanding Spain’s fiscal performance and the country’s room for maneuver against a background of high inflation and slowing growth. Pension spending remains the largest single item in the state budget by far, representing close to 40% of total spending (excluding European Union (EU) funds).

Key highlights include:
-- Pensions will be adjusted 8.5% YoY in 2023, leading to a rapid increase in overall pension spending of 11.4%. High inflation and demographics will keep this growth rate elevated in coming years.
-- The government has implemented and is working on further measures intended to tackle the sustainability of the pension system, but approved measures are deemed insufficient thus far.
-- The automatic indexation of pensions, in the absence of corrective measures, effectively crowds out other discretionary spending and/or a slowdown in the pace of fiscal rebalancing.

“Pension spending will increase significantly in 2023, adding to structural spending pressures,” said Javier Rouillet, Vice President, Global Sovereign Ratings Group. “The implementation of additional measures to improve the sustainability of the pension system will continue to be key to reducing Spain’s fiscal gap in the coming years,” added Javier Rouillet.