Moody’s asks Spain for more adjustments in the pension system to avoid a deterioration in its credit rating

The US rating agency Moody’s issues a warning to sailors: if Spain does not make new pension adjustments, the system’s deficit will begin to put pressure on the country’s credit profile from the end of this decade. This would make it difficult to finance them in the markets by making their debt issues more expensive. This is the main warning issued this Tuesday by the US rating agency Moody’s, which once again called attention to “a foreseeable worsening of the budgetary imbalances of the Spanish public accounts as a result of the growing deficits in the pension system; which will exert negative pressure on the Spanish debt rating (Baa1 stable) in the coming years.”

Given this warning, the analysts of this entity suggest “the adoption of new savings measures to guarantee the long-term sustainability of the pension system would be something positive from a credit point of view.” Specifically, they point out the convenience of carrying out “structural reforms that increase the employment rate or potential real GDP.” They calculate, for example, that if the Spanish economy grew more than the 1.25% annually included in Moody’s projections in the period 2023-2060, half a point of the Social Security deficit would be saved in 2030; 1.4 points in 2040 and 2.3 points in 2050. This would leave the system’s deficit around 2% in the 2040s “and could be reduced even further with additional measures,” they add.

The need to take new measures in the field of pensions is determined, according to Moody’s, because of the intense aging of the Spanish population – it will go from the current nine million pensioners to 12 million in 2040 and will reach a maximum of 14 million in the decade of 2050,—and the political decision to revalue all benefits with the CPI by law, will reduce the effectiveness of the latest reform of the system led by the Minister of Social Security Inclusion and Migration, José Luis Escrivá.

“The Spanish Government has recently introduced measures to increase Social Security income, as well as incentives for people to voluntarily delay their retirement, but their effects will be undermined by the expected increase in pension spending due to the already aging population. the decision of the Government – endorsed by the majority of the parliamentary arch and the social agents – to link the payment of future pensions to inflation,” specifies the Moody’s document released this Tuesday, where its analysts clarify, however, that this analysis It does not imply the announcement of any requalification decision for Spain. Furthermore, according to their estimates, these measures of the latest pension reform carried out in two phases (2021 and 2023) will increase income by around 1% at their peak, which shows the difficulty of addressing system deficits that, according to This agency can reach 4% of GDP by the end of the 2040s.

The fact that the Spanish population is going to age faster than that of its neighboring countries is of particular concern to the analysts of this debt rating agency. They consider that “it is unlikely that the population of working age, which ultimately is the one that finances the payment of pensions, will keep up with the pace of population aging, even if the current high rates of net immigration are maintained” .

According to the last Aging Report 2021 According to the European Commission, the elderly dependency rate (percentage of those over 65 years of age in the total population) will double in the coming decades to reach 65% in 2050, compared to the 57% average expected for the EU. in that year. This represents the largest increase of all EU countries and only Portugal, Greece and Italy will have rates higher than Spain in that year. In this way, the ratio of people of working age per person over 65 years of age will go in Spain from 3.1 in 2019 to 1.5 in 2050, which will skyrocket spending on pensions and make their financing extremely difficult.

Consequently, the main warning issued by Moody’s is that the Spanish Social Security deficit will gradually increase until the end of the 2040s. In 2030, in the absence of new measures, this deficit will have increased by 0.9 percentage points to reach at 1.4% of GDP, from the 0.5% planned by the Government for 2023 (without taking into account the pensions of the passive classes). In the following decade, the deficit will increase by a further 1.8 percentage points, to 3.2% of GDP. “And we estimate that the Social Security deficit will not begin to reduce again before the end of the 2040s, when it will reach a maximum of 4% of GDP, even exceeding the deficit we expect for all levels of public administrations ( which is expected to be 3.2% of GDP in 2024)”, explain the economists from the US agency.

At Moody’s they admit that the Government “is willing to address spending deviations” as established by the latest pension reform, every three years and in a process in which the Independent Authority for Fiscal Responsibility (Airef) participates, and according to as stipulated in the Intergenerational Equity Mechanism (MEI). Although, immediately afterwards, the authors of this document remember that any measure will require parliamentary approval and this is not guaranteed, they indicate.

Impact of the measures taken

The agency acknowledges that the latest pension reform will raise Social Security revenues from the current amount equivalent to 13.1% of GDP to around 13.7% of GDP by the end of this decade (and then fall back to 13% when the application of temporary measures to increase collection ends). Although, also on this point, Moody’s analysts issue another warning: expected revenues could be lower if the measures taken precisely to raise them had “undesirable economic effects” such as, for example, the possible loss of 100,000 jobs (due to the different increases in social contributions approved), according to calculations from sources not cited in this report.

Along with this possibility that the system will receive less than expected, this agency adds that the effectiveness of the incentives approved to voluntarily delay the retirement age of active workers, as a savings measure, “could be limited.” And they go further, by pointing out measures that, directly, in their opinion, “will have a negative impact on the accounts”, such as the revaluation with the CPI of pensions, at the same time that the Government abolished the sustainability factor approved in 2013, which linked the amount of future pensions to life expectancy.

These decisions “have a cost” they assure from Moody’s, where they also highlight that the system will be subjected to other tensions such as the substitution effect (the new pensions are now 25% higher than those that are canceled due to better contribution rates). , which has been increasing spending for years; or the increase in minimum pensions well above inflation between 2024 and 2027, to close the gap with the poverty line and the increase, to a lesser extent, in maximum pensions, in this case slightly above the CPI, to offset the higher contributions of high incomes.

All of this, and if no additional measures are adopted, will increase pension spending by around 3.4 percentage points to 14.7% of GDP in 2040, which represents an increase three times higher than the average EU forecast for the period 2019-2040, according to the Commission’s forecasts. What’s more, they estimate that if the entire Social Security system is taken into account and not just contributory pensions, total spending will increase to 15.1% of GDP in 2030 and up to 16.8% in 2040.

Follow all the information Economy and Business in Facebook and Twitteror in our weekly newsletter