The Spanish public pension system has two sources of financing. The main one is the income from social contributions paid by workers and employers and which are used to pay for current pensions. That is why it is a “contributory” system, because it is funded fundamentally with the contributions of active employees and “distribution”, because current retirees receive their pensions based on what they have contributed in the past and are paid by the contributions. of active workers. However, these contributions are not enough to pay the pension payroll and that is why the system needs the second other source of financing, which is general taxes. And at this point comes the debate on the fact that the growing payment of pensions with taxes prevents them from being allocated to other uses.
Starting from the design of the pension system, Fedea researcher and professor at the Rey Juan Carlos University, Miguel Ángel García, draws attention to the red numbers represented by the exclusively contributory part of the pension system (income from contributions less pension payments contributory), without counting the part that is paid with taxes. This negative balance would have escalated in 2023 to 55,919 million euros, which is equivalent to 3.8 points of GDP, somewhat higher than the deficit with which the public administrations closed (3.7%).
To arrive at this figure, García starts from the official results of the Social Security System, which ended 2023 with a deficit equivalent to 0.6% of GDP, a figure very similar to that of the previous year. Although this percentage is specified, it would increase by two tenths, to 0.8% of GDP, if the contributions destined to the Intergenerational Equity Mechanism are excluded from current income, “because these are income not available to pay current pensions since It is entered into the reserve fund that will only be available from 2032.”
That said, this economist explains that to pay the entire pension bill, Social Security has made available, in addition to the ordinary net income from social contributions, two other specific transfers from the State worth 27,231 million euros (1. 9% of GDP): one for the payment of supplements for minimum pensions (7,345 million euros), and the second, much higher in amount, intended for the payment of what García considers “misnamed” improper expenses (19,886 million euros). In this way, if these tax transfers are not accounted for, what this researcher calls “contributory balance of the Social Security system” would be almost 2.7% of GDP. And to this he adds another 1.2 points of GDP in State transfers (also taxes) for the payment of passive class pensions of retired civil servants. All in all, the aforementioned contributory deficit of 3.8 points of GDP is reached, which has to be financed with debt and general taxes.
The Government, through the Ministry of Social Security, rejects this accounting, arguing that the resource of paying part of the pension system with taxes is legitimate and very common in other countries in the community environment. However, García and many other pension researchers argue that it is precisely this financial x-ray of the system that allows a more correct analysis of its operation to take the necessary measures to guarantee its sustainability.
Therefore, for the defenders of this accounting, it is important that the financial situation of only the contributory part of the pension system – whose expenditure absorbs 13.1% of GDP and almost 30% of total public expenditure – be the subject of debate in society because the more tax resources required to finance pensions, the less financing there will be for other possible uses of public spending, García warns.