Friday, June 2, 2023

France and Spain take different paths in pension reform, with mixed results

Jakub Suwalsky (Scope Rating | France and Spain have reformed their pension systems this year to give them a stronger financial base and stimulate employment, but given their similar demographic trends, there is uncertainty about their long-term stability and impact on the economy Questions remain.

One of the differences is that the Spanish government has achieved a consensus on pension changes, while the French executive has not won an absolute parliamentary majority to support its reforms, which was opposed by the unions and which has led to protests and protests. There have been massive strikes.

The content of the reforms is also different. France (AA/stable) seeks to rebalance its pension system by increasing the legal retirement age from 62 to 64 and requiring longer contributions for the full pension. In contrast, Spain (A-/Stable), whose statutory retirement age will rise to around 67 in 2027, focuses on increasing contributions from companies and young workers, including an alternative calculation of pension amounts and an increase in the Intergenerational Equity Mechanism (MIE) Is. Tax.

However, the challenge is fundamentally the same: coping with the inevitable increase in the cost of providing retirement income in countries with tax-funded pension systems where the gap between the proportion of working-age and retirement-age adults is widening. ,

In both countries the reforms only represent an increase in overall reforms, increasing the tax burden in the long term in the case of Spain and having only a modest effect in the case of France, while providing no immediate solution to the problem of chronic unemployment. Older members of the workforce – hence the need for deeper reforms.

Graph 1 – Demographic pressures are more acute in Spain than in France

The French and Spanish economies are characterized by high unemployment before retirement.

France and Spain have aging populations and birth rates below replacement level, although the intensity of the pressure varies. In Spain, the population is rapidly ageing, while the fertility rate is one of the lowest in Europe, leading to a reduction in the workforce and an increase in the elderly population, hence the pressure on the pension system, which is in deficit. In contrast, the aging of the population in France is more gradual, mainly due to the high fertility rate.

France and Spain stand out for their very low levels of employment among older workers. In 2021, the employment rate for workers aged 55-64 is expected to be just under 56% in both countries, compared to an average of around 61% in the euro area.

Spain’s priority in its pension reform was to benefit the most vulnerable, such as those with irregular professional careers, and avoid cuts to young people’s pensions through a progressive increase in maximum contribution limits and the creation of solidarity quotas. The reforms include an alternative calculation for pension payments that excludes the 24 worst paid months and extends the calculation to 29 years of service.

These measures require a significant increase in pension spending over the coming decades without increasing contribution income, despite some compensatory measures: a cap on the maximum pension, incentives to delay retirement, the introduction of a solidarity tax and an IEM tax. Doubling up to 1.2%. 2029.

Chart 2 – Spain and France have the highest pension spending in the OECD

France and spain take different paths in pension reform, with mixed results

Pension deficit widens in Spain; Doubts About the Abolition of France

According to a report by AIReF, Spain’s total public spending will increase steadily after this reform to reach 16.2% of GDP in 2050 from 13.6% of GDP in 2021. Over the same period, the structural deficit of the pension system would increase by about 1.1 percentage points of GDP, higher than government projections of a more modest increase of 0.3 percentage points. The increase in social contribution falls mainly on companies, which in turn can put a burden on job creation and wage growth.

In France, the recently adopted reform may be insufficient to fill the pension system’s funding deficit, according to recent estimates by the Rexcode expert group, which considers the government’s forecasts too optimistic. The resulting net fiscal gain of a moderate 0.6% of GDP by 2030 would leave the pension system with a deficit of around 0.2-0.6% of GDP. The exemptions have diluted the impact of expanding the retirement age, so most of the benefits will come from increased tax revenues based on assumptions of higher growth and employment growth over the medium term.

Although we see less financial readiness for new pension reforms in France than in Spain, the question is whether the lack of political consensus on those that have just been enacted is slowing the French government’s efforts on other structural reforms. Will do – and what Spain can benefit from Even more, their consent to lengthen their pension system.

Nation World News Desk
Nation World News Desk
Nation World News is the fastest emerging news website covering all the latest news, world’s top stories, science news entertainment sports cricket’s latest discoveries, new technology gadgets, politics news, and more.
Latest news
Related news


Please enter your comment!
Please enter your name here