Demographic Change and Pension Reform in Spain: An Assessment in a Two-Earner, OLG Model

Recent pension reforms in Spain have been guided by two opposite goals, achieving financial stability and improving redistributive aspirations. In particular, reforms implemented in 1997/2002 entailed a mixture of both through (i) changes in the pension formula, (ii) the extension in the entitlement to early retirement to all cohorts, and, finally, (iii) increases in survival pensions. This paper builds an Applied General Equilibrium OLG model that captures the fundamental non-stationarity of the Spanish reality (ageing population, education transition and increasing female's attachment to the labour market) to assess the impact of those reforms. As a novel feature with respect to the literature, households in our model economy are made of two potential earners that make saving and labour supply decisions. Our main conclusions from the analysis are at three different levels. First, the Spanish pension system is clearly unsustainable, the pension expenditure will reach a figure of about 18% of the GDP in 2050, and the reforms have been clearly ineffective in improving the financial prospects of it. Second the reforms have had substantial redistributed effects, benefiting low educated groups against high educated and future cohorts against current cohorts. Finally we show that exploring the financial prospects with traditional single earner households models may result in underestimates of the future financial burden of the pension system.