Spanish pension is generous, but unsustainable

Published on: 7 January 2022

The second-best pension system in the world. That's what we have in the Netherlands, according to the annually published Mercer CFA Institute Global Pension Index, in which 43 countries are included. Are the other countries really performing that poorly? Every two weeks and during twenty weeks, we delve into the system of a specific country. We make our way south to the country of Dalí, Picasso and tapas: Spain.


The amount Spain is paying on pensions is tremendous. Apart from Greece, the total amount paid on pension is the highest in Europe. That is mainly due to the fact that Spaniards with low- and middle-incomes receive no less than 90 percent of their earned wages in pension. So, it will not be due to a lack of adequacy of the pension (on that aspect Spain takes 12th place on the Mercer ranking containing 43 countries) that the country's pension system holds 24th position on this ranking. The problem may rather be attributed to the financing of the Spanish system.


The mandatory state pension – on which most pensioners in Spain depend – is based on a pay-as-you-go scheme. In other words: the working population pays for the pensioner's old age. And as the population in Spain is aging as well, the pension of a growing group of pensionados must be funded by a decreasing group of workers. It doesn't take a mathematical genius to see the storm coming: the Spanish pension system is unsustainable in the long term. On that aspect - durability - Spain is listed in the lower reaches of the Mercer index (39th place). In comparison: in terms of durability the Dutch system holds 3rd place, while it beats the Spanish system when it comes to adequacy of the pension (2nd).

The fact that the Dutch system offers a higher pension compared to the Spanish system and is more sustainable at the same time, has everything to do with the funding. Whereas the Spanish system is almost entirely based on pay-as-you-go, that only applies to the AOW (state pension) in the Netherlands. A significant part of our pensions (the second pillar) is capital funded. That means the employee accrues his/her own pension through a pension fund. And even though the Netherlands is also aging, the negative effect thereof is not proportionate to the impact of an aging population on a pay-as-you-go funded pension system.

So, the system will also be thoroughly redesigned in Spain. The pre-pension will be made less attractive, for instance, a financial incentive will be implemented for people postponing their pension and the pensionable age will be increasing during the years to come. The pensionable age now is 65, and this should be increased to 67 by 2027. On average, Spaniards stop working at the age of 62.1. Until recently, men enjoyed their pension for 21.7 years on average and women for 26.6 years.

The pension reforms, commenced in 2011, are not accepted by the pensionistas without a struggle. The pension payment of more than five million of them is less than 700 euro, making it very difficult to make ends meet. Regular - and sometimes mass – demonstrations have been taken place in a number of large Spanish cities since 2011, demanding the right to receive a decent pension payment.

In order to be eligible for retirement pension at all in Spain, you must have paid contributions for at least 15 years. In 2018 the legal pensionable age, at which you will receive a full pension, was 65 years and 6 months, that is to say for the Spaniards who had paid contributions for less than 36 years and six months. By 2027, the legal pensionable age will be 67 years old. Did you pay contributions for 38.5 years or more? That full pension, if desired, can already be received at the age of 65.


Continued employment awarded
People continuing employment after the pensionable age is awarded in Spain. For employees who have paid contributions for 15 to 25 years and continue their employment after the age of 67, the pension increases by 2 percent (of the calculation base) for each extra year worked. This ‘bonus’ amounts to 2.75 percent after 25-37 years of payment of contributions and an annual increase of no less than 4 percent is in prospect for those who paid contributions even longer.



The Spanish pension system:  Facts & Figures


Valuation in the Mercer CFA Institute Global Pension Index 2021: C-Grade (“A system with some good features, but also major risks and shortcomings. If these issues are not addressed, the question is whether the system will be tenable and adequate in the long term.”)

System with one pillar, pension based on period of service and income

Almost entirely funded based on pay-as-you-go

Adequacy (Mercer ranking):
12th (the Netherlands: 2nd)        

Durability (Mercer ranking):
39th (the Netherlands: 3rd)

Integrity (Mercer ranking):
19th (the Netherlands: 3rd)










Net pension







Net replacement rate







Total net pension assets upon retirement








Explanation table:

The column ‘1’ represents the situation for someone with the average net income. The column ‘0.5’ displays the situation of someone with half the average net income, et cetera.

Net pension: the net pension someone receives as a percentage of the net average income.

Net replacement ratio: the net pension remaining, expressed in a percentage of the total wage of the individual concerned.

Total net pension assets: value of the anticipated payments as a multiple of net annual income.