Europe seeks the formula to save pensions: what can Spain learn from it?

Brussels / MadridThe eternal debate over the pension model in Spain has returned to fill headlines with reproaches. Supporters of the current model argue that it is perfectly sustainable, while opponents try to perform a balancing act to justify both that they will be able to pay future retirees and that changes must be applied to the system.

Beyond the political clash, however, fears regarding the pension system are shared by the European economy as a whole. The European population is among the oldest in the world: in Spain, the average citizen is 45 years old, a figure practically equal to that of the EU average, but higher than the 39 years of the average North American and the 19 of the average African.

Aging has an impact on the labor world: the EU already has fewer than three working-age residents for every pensioner. And public spending on pensions, health, and long-term care for the elderly is equivalent to one-fifth of the gross domestic product (GDP, the indicator that measures the size of an economy) of the community bloc, a trend that is on the rise.

The massive arrival of immigration can mitigate the consequences of this population aging and low birth rate by injecting muscle into the country's productive fabric. But it is not enough to reverse the trend. Especially if they occupy low-skilled jobs where remuneration is low and, therefore, they contribute less.

At present, pension spending in Spain borders on 13% of GDP, a proportion slightly higher than the EU average (12.2%). This figure has been creeping up in recent years and the trend will continue to rise, taking into account that the Spanish baby boom generation (born in the 60s and 70s), the largest one, is just now starting to retire.

According to the OECD analysis published in 2025, by 2050 public spending on pensions could account for up to 16.1% of GDP. In contrast, according to the Spanish government's calculations, the net average expenditure projection will stand at 14% of GDP between 2022 and 2050. The Airef places it at 14.4% and the European Commission at 14.6%. From 2050 onwards, when the bulk of the baby boom has already retired, the trend should be downward.

Population aging is a problem that affects the entire continent. But there are states where, due to the nature of their pension models, it has a lesser impact. Thus, a legitimate question arises: how do the rest of the European countries manage it? Can Spain learn any lessons from the models applied there?

The Spanish model

To delve into this issue, first we must understand how the Spanish model, known as a pay-as-you-go system, works. Broadly speaking, it means that active workers are the ones who, through their contributions, cover the pensions of current retirees. When a person works, they generate rights for a future pension based on their contribution and, therefore, their salary, but they do not accumulate their money in an account; instead, the government uses it to pay the benefits of today's pensioners.

The Spanish system underwent a major reform in 2021 with the aim of adjusting spending and improving revenue. For example, it penalized early retirement and gradually extended the pension calculation period, that is, the number of years worked. In parallel, an attempt was made to recover the pension piggy bank or reserve fund that had been created to compensate for imbalances in the pension system. This piggy bank was emptied during the 2008 crisis and went from a fund of more than 66 billion euros to one of just over 2 billion in 2018. With the reform, which intended to refill it, an intergenerational equity mechanism (MEI) was introduced, which implies increasing all contributions by up to 0.6 percentage points and which will scale up to reach an increase of 1.2 percentage points from 2029 until 2050.

Pay-as-you-go or capitalization?

This model contrasts with the capitalization system, in which each worker (often together with the company) contributes money to an account or fund —individual or collective— which is then invested in financial markets and generates returns. When the person retires, the pension is paid with the accumulated capital plus the returns obtained.

In Europe, there is no country with an entirely private model; most states opt for a mixed system that combines the pay-as-you-go model with the capitalization one.

Denmark

The Danish system combines a public pension that guarantees a base income with contributions to private pension plans managed through collective bargaining agreements. Currently, 9 out of 10 workers have a company fund where the company contributes the majority of the monthly installment, ensuring a very high coverage of the so-called "second pillar".

Netherlands

The Dutch model is similar to the Danish one, as it combines a public pension with occupational plans. More than 90% of workers contribute part of their salary to collective pension funds managed by unions and employers' associations. This model stands out for having one of the largest managed pension funds in the world in relation to GDP, which allows for maintaining final payouts very close to the last salary.

Sweden

The Swedish system is based on a system of virtual accounts, where contributions are revalued according to economic growth and are automatically adjusted to life expectancy. In addition, it mandatorily allocates 2.5% of contributions to a private investment fund chosen by the citizen.

France

The French model is similar to the Spanish one and is characterized by a significant weight of the public pay-as-you-go sector. It is structured into a basic public pension and a network of mandatory supplementary regimes managed by points (AGIRC-ARRCO), which leave a testimonial role for private pension plans.

Austria

It maintains a public pay-as-you-go model with one of the highest replacement rates in the OECD (the public pension can exceed 80% of the worker's average salary). It uses an individual pension account that calculates the benefit over the entire working life and also has a mandatory private corporate fund where the company contributes 1.5% of the monthly salary.

The retirement age

Postponing the retirement age across the continent is the most widespread measure to reduce the weight of pensions on GDP. And, not surprisingly, it has often been the battering ram of trade union struggles. While countries like Belgium or Germany have exact pre-established ages, others like Finland or Italy link it automatically to life expectancy. Spain (like France) combines an ordinary legal age with the duration of the contribution career.

In the EU, the actual average retirement age for a worker who started working at 22 is 64.7 years. But over the coming years, the different states foresee a progressive increase in the legal age. In Denmark, for example, it is set to reach 74 years. It is followed by Estonia, with 71 years, and the Netherlands, Sweden and Italy, all three with 70 years. At the opposite extreme, Luxembourg and Slovenia maintain the projected retirement age at 62 years, France at 64 years and Spain at 67.

This difference generates suspicion. There are critics, such as researcher at the think tankBruegelJacob Funk Kirkegaard, who argue that the right to retire early "is paid for by future generations." "I am very sure that most European countries will end up having retirement ages close to that of Denmark today, that is, about 70. Otherwise, the system will go bankrupt," he tells ARA.

Differences between models also impact the income that retirees receive. The average remuneration in the EU guaranteed by public pensions is €17,327. Luxembourg leads the ranking in the bloc with an average annual pension of €34,413, followed by Denmark (€30,543), Austria (€26,129) and the Netherlands (€25,417). Spain, with an average of €19,844 per year, is in sixth position.

Conversely, when purchasing power is adjusted according to the cost of living in each country, states like Spain and Italy significantly improve their position. In contrast, countries with higher wages and prices suffer the opposite effect: Denmark drops from 2nd to 5th position and Ireland even falls below the EU average.

Pros and cons

In the report The Danes, the Dutch, the Swedes and the viability of abandoning pay-as-you-go pensions, Funk Kirkegaard defends the transition towards capitalization or occupational systems. He puts forward three arguments. First, he says that they "provide more financial soundness", since workers' contributions are invested in savings and the return usually exceeds the cost of public debt. Secondly, he highlights that pension funds provide capital that serves to finance business and technological investments, so that a "virtuous circle" of productivity is produced. Finally, he maintains, they incentivize delaying the retirement age, since those who work more years receive a higher pension.

This model, for Kirkegaard, has worked in the countries where it was implemented in the nineties. But for states where a pay-as-you-go system is already in place, such as Spain, making the transition is complicated. He estimates that it would take between 20 and 30 years, but argues that it must be started "as soon as possible".

On the other side of the balance, proponents of strengthening the public pay-as-you-go system reject diverting resources to financial markets and propose transforming its financing. Their commitment to keeping the system viable involves, therefore, injecting funds into Social Security through direct taxes on high incomes and large fortunes.

According to the UB professor of economics Montserrat Guillén, the advantage of pay-as-you-go pensions is their mandatory nature, that is, that "everyone must contribute to be able to pay for the pensions". In Northern Europe, she says, "the public pension is very low, but the capitalization part complements it and you can end up having a very high pension. But you can also end up very low. There is a wider range of variation, while in Spain there is very little range of variation".

At heart, adds Montserrat, everything depends on how the economy functions. "Whatever the system is, it is always very dependent on the economic situation of the labor market and prices. If the economy does poorly, the pension system will surely suffer", she says. Thus, she argues, a system capable of resisting times when the economy does poorly is necessary. "Longevity is clear to us. The challenge is not only demographic—she asserts—, where we want to reach is to make real wages higher".