April 10, 2021

Public debt will exceed 130% of GDP if pensions are not reformed

Public debt will exceed 130% of GDP if pensions are not reformed


Linking pensions to the CPI will put pressure on spending, especially after 2030, when the baby boom generation begins to retire, which will raise pension spending from the current 10.6% to 13.4% of the GDP in 2048, as explained by the Independent Authority for Fiscal Responsibility (AIReF) in its latest debt observatory.

In a scenario without pension reforms, the maintenance of the purchasing power of pensions would imply an increase in public debt of around 50 points of GDP in 2048. Therefore, the forecast of AIReF's pension expenditure – which estimates an increase of almost 3% of GDP per year- would also affect the dynamics of the debt ratio, which would stand at 132.2% of GDP over the next 30 years, as long as the primary balance of GDP remains constant. 2018 in the subsectors of the Public Administrations. However, in a normative scenario in which the pressures from the updating of pensions to the CPI are assumed, AIReF estimates that the public debt could stabilize below 75% of GDP if there is a fiscal policy convergent to the budgetary balance in the long-term.

In the third scenario, AIReF explains that in order to achieve a dynamic of continued reduction of the debt ratio up to the reference level of 60% of GDP, it is necessary to implement reforms to reduce the impact of aging, such as the increase in the life of the contribution. and of the effective age of retirement. If compliance with fiscal rules is added to these reforms, the reference level of 60% of GDP in 2031 could be achieved.

On the other hand, the risk of sustainability of the autonomous communities is "slightly high" at the aggregate level. However, at the individual level, the situation is very different. Catalonia, Castilla-La Mancha, Valencia and Murcia present a "very high" risk. The main vulnerabilities in the regions continue to be the high level of indebtedness and the growing dependence on extraordinary financing mechanisms.

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