The OECD, the Organisation for Economic co-operation and Development, has told Spain that it must reform its pensions system to prepare for the consequences of population ageing, although the economic situation is still favourable.
In its June policy brief, the OECD claims that Spain's recent reforms do not go far enough and that additional measures are needed to prepare the country for the effects of an ageing population.
From 2020-25, the OECD says Spain's demographic shock will be particularly severe, and its impact on pensions has not been lessened by the 1997 and March 2001 reforms of the social security’s pay-as-you-go system.
Additionally, the OECD believes that Spain’s social partners have not yet faced up to what it calls the rather stark long-term unsustainability of current arrangements.
According to the Paris-based organisation, Spain must cut back on what it calls the one of the most generous pension systems of OECD member countries and it should consider introducing compulsory second pillar pension funds. The OECD claims that a stronger funded second pillar would partly offset the reduced generosity of the public pension regime, and bring greater flexibility to the overall system.
The OECD believes that the focus of any reforms should be on reducing the cost of the pay-as-you-go system, rather than increasing the funding. Measures recommended by the OECD include basing pensions on earnings over a whole career instead of the last 15 years, raising the number of contribution years for a full pension from 35 to 40, and lowering the earnings replacement rate from its current level of close to 100 per cent for a full contribution career.
Spain should also look keeping people working for longer by eliminating the disincentives to prolonging working life.
By Geoffrey Ho
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