• I am a student. Spain will lead the EU and the OECD in social contributions to GDP
  • Economic impact. 0.6 points less GDP, 190,000 jobs and 2% drop in wages

The Bank of Spain has warned that the average income of the country, which contributes to Social Security for a base lower than the maximum, will be those that support the extra increase in social contributions in case the accounts do not add up and the automatic closure mechanism has to be applied, something that the supervisor sees likely, since it already warned in its annual report that in 2025 more measures would be needed.

"Royal Decree-Law 2/2023 has introduced an adjustment clause that could lead to an increase in the intergenerational equity mechanism (MEI) from 2026, to the extent that the average pension expenditure projected for the future deviates from a reference value and additional measures to contain expenditure or increase revenues are not approved. In such circumstances, the increase in effective contribution rates would be greater in salary brackets below the maximum contribution base, "warned the institution that governs Pablo Hernández de Cos in the first article in which he analyzes the reform of Minister José Luis Escrivá, published on Wednesday.

This institution already warned in its Annual Report, published in May, that the reform would mean in the projection horizon (until 2050) an increase in the system's revenues over GDP of 1.4 points, but expenses would shoot up by 3.7 points of GDP, with which the result would be deficit: 2.3 points of hole, the equivalent of about 30,000 million euros today.

Given this imbalance, the supervisor sees it likely that the closing clause will have to be activated, which stipulates that the Independent Authority for Fiscal Responsibility (AIReF) will calculate in March 2025 whether the approved income measures amount to 1.7 points of GDP, if this is not the case or if pension spending exceeds that level, the Government must submit to the Toledo Pact Commission a proposal to correct the deviation, which may include measures of income, expenditure or both. If there is no parliamentary agreement to approve the corrective measures, the EIF would automatically increase on 1 January of the following year by the amount necessary to compensate for 20% of the deviation, and would continue to increase year by year the amount needed to correct by 20% annually, until such time as new measures are adopted or the deviation is eliminated.

The professions most affected

The MEI affects all workers equally but since the average incomes are the most voluminous, they are the ones that contribute the most to the system.

However, the extra contribution that has been approved for high incomes that are above the maximum contribution base will only affect high salaries and will have more impact on those professions in which there is a higher proportion of workers in those salary levels.

Especially noteworthy are workers in financial services, where more than half of the workforce (54.4%) exceeds 4,495.50 euros per month; followed by business management consulting professionals (with 20.2% of professionals at those levels); those of activities related to computer services (19.3%) and health, where 17% of workers exceed the maximum base.

Less optimism than the government

The Government has relied its reform mainly on three income measures: the MEI, an additional finalist contribution that all workers have already paid since January 1 of this year and that, in case of increasing in the event of an imbalance, will be charged mainly to average incomes, as the supervisor has warned; an increase in the maximum contribution base, between 2024 and 2050, above the increase in prices and, in particular, more intense than the maximum pension will rise; and, thirdly, an additional contribution on wages above the maximum contribution base, called 'solidarity surcharge', which will come into force in 2025.

The set of these three measures – to which are added others that will also reinforce income such as the disincentive to retire at an early age – will contribute to the system revenues worth 0.9 points of GDP in 2050, according to the Bank of Spain, less than what is foreseen by the Ministry of Social Security, which calculates that the income from these three policies will be 1.1 points of GDP.

The Bank of Spain is less optimistic in this calculation and, in addition, warns that these 0.9 points of GDP will be achieved in case the rise in contributions, which in practice are more labor costs for companies, do not "negatively affect competitiveness, wages or employment", something that usually happens.

In its annual report, it already warned that an increase of one percentage point in the average effective rate of social contributions could generate, after four years, a fall in the number of employed close to 0.25%, "which would pose a non-negligible downside risk on income estimates (ex ante)". He admitted, however, that other analytical work points to appreciably different elasticities, both upwards and downwards.

  • GDP
  • Social security
  • Pension
  • Articles Alejandra Olcese

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