Pensions in Spain: A Reform that Backfires
By Julián Díaz Saavedra & Javier Díaz-Giménez
After the pension policy reversal that took place at the end of the past decade, the Spanish government approved a pack of new parametric changes to its public pension system, to cope with the present and future Spanish pension system imbalance. To study these changes, we use a large-scale overlapping generations model calibrated to the Spanish Economy, and show that this pension reform backfires. This is because these changes bring no significant variation to the sustainability problems that plague the Spanish public pension system. In addition, this pension reform hurts current and future high earners’ welfare, because the higher payroll taxes they have to pay. Thus, we conclude that further reforms are imminent in the near future of Spanish pensions. Policymakers should seriously consider overhauling the current Spanish public pension system and replacing it with a model that combines a sustainable contributory pay-as-you-go pensions with mandatory individual retirement accounts.
Source SSRN
