Moody's warns that Spain's higher pension spending may affect its credit rating

The Social Security deficit will soar to 3.

Moody's warns that Spain's higher pension spending may affect its credit rating

The Social Security deficit will soar to 3.2% in 2040 without additional measures, according to the rating agency


The risk rating agency Moody's estimates that the Spanish Social Security deficit "will increase significantly" in the next two decades in the absence of new adjustment measures as a consequence of the aging of the population and the greater spending on pensions that is linked to its rise. to inflation, which could negatively affect Spain's 'grade', currently located at 'Baa1' with a stable outlook.

Specifically, Moody's estimates that, without additional measures to those already adopted, the deficit of the Social Security system will increase to 1.4% by 2030 and to 3.2% by 2040, compared to 0.5% in 2022.

In addition, it foresees that this negative balance will not begin to decrease until the end of the 2040s, when it will reach a maximum of 4% of GDP, even exceeding the expected deficit for all levels of the Administration in 2024, of 3.2%. .

Moody's warns in a report on the pension system in Spain that the political changes after the 2011-2013 reforms "intensify the fiscal impact" on Social Security.

Thus, the agency points out that the latest pension reforms introduced by the Government of Pedro Sánchez, despite including measures to increase income and incentives for delaying retirement, "will be overshadowed" by the expected increase in pension spending due to both aging and the Executive's decision to link pensions to inflation.

Thus, assuming no policy change, Moody's estimates that Social Security spending, including pension and non-pension spending, will increase to around 15% of GDP by the end of this decade and up to 16.8% in 2040, from 13.5% in 2022.

For its part, Social Security income will rise to around 13.7% of GDP by the end of this decade, up from 13.1% in 2022, before falling again to 13% when the temporary measures adopted expire. by the Government, according to Moody's calculations.

These projections assume that Central Administration transfers will increase in line with inflation from 2.7% of GDP received in 2022.

"Revenues could be lower, however, if the new measures have undesirable economic effects. Some estimates suggest that the new measures will cause a permanent job loss of more than 100,000 jobs. This is especially relevant for a country like Spain , where the unemployment rate continues to hover around 12% despite the improvements of the last decade," Moody's underlines.

The agency warns in its report that, if action is not taken, pensions will exert credit pressure at the end of this decade. "In previous studies we have underlined that the worsening of fiscal imbalances due to measures to increase the deficit would exert negative pressure on the rating (...) The application of new saving measures to guarantee the long-term sustainability of the pension system pensions would be positive from a credit point of view," says the agency.

According to Moody's, measures to encourage income are an option, but they have limitations and trade-offs, and savings measures "may be effective and are likely to be applied given the magnitude of the projected deficit" for the Social Security system.

According to his calculations, all revenue measures contemplated in the 2021-2023 reforms will amount to around 1% of GDP at their peak.

In his opinion, structural reforms that boost the growth potential of the Spanish economy or the employment rate "would probably have a great impact" on the deficit, although they will take time to materialize.

For example, Moody's notes that structural reforms that raise potential real GDP to 2% in 2023-2060 would save 0.5 points of the Social Security deficit in 2030; 1.4 points in 2040 and 2.3 points in 2050.

"This would leave the Social Security deficit around 2% in the 2040s, which could be reduced to more modest levels with other measures. However, these measures will take time to materialize, a period during which deficits will increase," underlines.

Moody's points out in its report that the Spanish population is aging "at one of the fastest rates in Europe." The number of pensioners will increase significantly in the coming decades, exceeding 12 million in 2040 and peaking at 14 million in the 2050s, up from 9 million in 2022.

Since the working-age population will not match this type of growth, Spain will have one of the highest old-age dependency ratios in the European Union by 2050, with a number of working-age people for every older person of 65 years that will be reduced from 3.1 to 1.5, according to the report on aging 2021 of the European Commission.

"The Spanish working-age population, which will ultimately finance pension-related spending, is unlikely to keep pace with this type of growth, even if current high rates of net migration continue," Moody's notes. .

In fact, the European Commission's 2021 aging population report predicts that Spain's elderly dependency rate will double, reaching 65% in 2050, exceeding the EU average of 1957. %. Only Portugal, Greece and Italy will have higher ratios at that time.