Intergenerational transfers and the demographic challenge

Population ageing poses one of the most significant fiscal challenges Spain will face over the coming decades. This policy brief applies the National Transfer Accounts (NTA) methodology to quantify how the taxes paid and public benefits received are distributed across the life cycle in Spain in 2024.

The fiscal life cycle:

→   A representative individual is a net recipient from the public sector during childhood and old age, and a net contributor during working life.

→   On average, the age-assignable fiscal balance peaks at around age 50, with a positive net contribution of approximately €11,000 per year, and falls to a deficit of some €16,000 by age 70, when the end of working activity coincides with the onset of pension receipt.

→   41 % of the Spanish population records a positive net fiscal balance. This proportion rises to 68 % among adults aged 25 to 64 and falls below 10 % at the extremes of the life cycle, reflecting the design of our welfare state.

The age-assignable fiscal balance:

→   Under an exercise applying current fiscal profiles across the entire life cycle, the net balance of a representative individual born in 2024 would be negative by around €140,000 in present value.

→   In aggregate terms, the taxes considered do not cover age-assignable public spending: the age-assignable fiscal balance was negative in 2024, standing at around €30,213 million (1.9 % of GDP).

→   This indicator is not equivalent to the total public deficit (or surplus), but rather to the balance of the revenue and expenditure items that can be assigned by age under this methodology (85 % of the total).

The projection to 2050:

→   A simulation to observe what would happen to the age-assignable fiscal balance if the current system operated on the demographic structure projected for 2050 yields a negative age-assignable fiscal balance of between 6.1 % and 8.5 % of GDP, depending on the migration scenario.

→   This magnitude reflects a twofold effect: the weight of the baby-boom cohorts shifting towards the ages of highest public spending, and the smaller representation of working-age cohorts as a consequence of decades of low fertility.

→   As a sensitivity analysis, applying alternative assumptions about the relative evolution of pensions, healthcare, and personal income tax (IRPF) attenuates the estimated deterioration. In the central scenario, the age-assignable fiscal balance would move from −6.8 % to −3.2 % of the 2050 counterfactual GDP.

The role of education, immigration, and fertility:

→   Between the ages of 30 and 54, the average net fiscal balance is €15,900 per year for a person with higher education, €6,300 for someone with a baccalaureate or intermediate vocational training, and €2,500 for those who did not complete lower-secondary education (ESO).

→   The higher educational attainment of younger cohorts partially offsets the effect of ageing, although on its own it is not enough to reverse the estimated gap.

→   Moving from a scenario of zero net migration to a moderate one (330,000 people per year, the 2000–2024 average) reduces the simulated deficit by 1.7 percentage points of GDP. However, raising that migratory flow to 550,000 people (the 2021–2024 average) only trims a further seven tenths.

→   The exercise assumes that new immigrants replicate the educational level of the foreign-born population already resident, which has a lower rate of higher education and therefore lower per capita fiscal balances than the native population. This contribution could increase with an eventual convergence associated with educational and labour/professional integration policies to that end.

→   In any case, the demographic advantage of immigration is transitory: the immigrants who are of working age today will, over time, retire.

→   On the horizon to 2050, higher birth rates would first increase the dependent child population, resulting in a deterioration of the fiscal balance.

→   The positive effects of higher birth rates would materialise during the second half of the 21st century.

The origin of the imbalance:

→   These results shift the focus away from population structure and towards the design of life-cycle-sensitive public spending, and especially towards contributory pensions, the most significant item and the one with the greatest intergenerational implications.

→   The current rules of the pension system imply an estimated implicit real return of around 2.61 % per year, above the real growth of the system’s revenues (1.4 % per year between 2005 and 2024).

→   This gap defines the structural sustainability tension and will increasingly be transferred to the public budget as the baby-boom cohorts complete their transition into retirement.

Three lines of reform:

We point to three complementary lines of reform that economic policymakers should consider:

→   Raise labour-force participation at older ages. Between the ages of 55 and 64, each employed person represents a net fiscal balance around €19,000 higher per year. If Spain were to converge to the 75th percentile of the European distribution of employment rates in that age bracket, net revenue would increase by around €14 billion (0.9 % of GDP).

→   Introduce mechanisms that link the effective retirement age to longevity, with safeguards for health, occupation, and career trajectory, as other European countries have already done. In this way, gains in longevity would be distributed in a predictable and transparent manner between additional years of activity and additional years of benefits.

→   Gradually transition towards a public system of notional defined-contribution accounts as an alternative for strengthening the actuarial sustainability of the system. This system would make the relationship between contributions and benefits explicit and coherent, aligning the system’s implicit return with the real financing capacity of the economy.

The three lines of reform share a common denominator: distributing the costs of ageing in a predictable and equitable way across generations, avoiding their less visible transfer to future generations through higher levels of debt.