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Delayed Workforce Entry and Pension Reform Could Push Retirement Age up by Six Years by 2065 to Maintain Living Standards

The delayed entry of young people into the labor market—reflected in an employment rate among 16- to 29-year-olds that is 15 percentage points lower than in 2007—is making it increasingly difficult to build long enough careers to qualify for a full pension at the standard retirement age. Young workers today who retire in 2065 and have only managed to contribute for 30 years will need to delay retirement until age 71 to compensate for lower contributions and maintain their pre-retirement standard of living. In addition, under the latest pension reform, they will be required to make higher contributions to Social Security in exchange for a pension with a replacement rate (ratio first pension payment to final salary) that is two percentage points lower than the current rate. If Spain were to adopt reforms similar to those being implemented in other European countries, the replacement rate could fall by an additional 10 to 20 percentage points. For individuals with only 30 years of contributions, this would mean a replacement rate of just 57.6%, compared to 77.1% for today’s retirees with the same contribution history.