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PENSIONS

Spain needs 25 million foreign workers to keep its pensions afloat

As the retirement of baby boomers looms, Spain's ageing population and declining birth rate mean the country will need millions of foreign workers to maintain its public pension pot and reinforce the labour market, the Bank of Spain has warned.

Published: 2 May 2024 09:46 CEST
Spain needs 25 million foreign workers to keep its pensions afloat
In 2024, approximately 6.5 million foreigners reside in Spain. (Photo by PAU BARRENA / AFP)

A recent study by the Bank of Spain estimates that the country will need up to 25 million more immigrant workers by 2053 in order to combat demographic ageing and maintain the ratio of workers to pensioners in order to support the pension system.

Without an influx of more foreign workers or sudden increase in the birth rate in Spain, something that seems very unlikely, experts fear that the growing disparity between working age people and pensioners could put the public pensions system in danger in the medium to long-term.

Like in many countries in the western world, the Spanish population is ageing, with the percentage of the population over 65 years of age predicted to peak in 2050, when almost one in three will be 65 years old or older.

READ ALSO: Spain’s over 65s exceed 20 percent of the population for the first time

By 2035 around one in four (26.0 percent) of Spaniards are expected to be 65 or older. That figure is currently around one fifth of the population.

Furthermore, this is compounded by falling birth rates. Spain’s birth rate hit a record low in 2023, falling to its lowest level since records began, according to INE data. Spain’s fertility rate is the second lowest in the European Union, with Eurostat figures showing there were just 1.19 births per woman in Spain in 2021, compared with 1.13 in Malta and 1.25 in Italy.

If nothing changes, the current ratio of 3.8 people of working age for every pensioner is predicted to plummet to just 2.1 by 2053, according to INE projections.

Maintaining this ratio seems unlikely moving forward, according to the report’s conclusions, something that would put pressure on pensions without significantly increasing social security contributions among working age people.

READ ALSO: Older and more diverse: What Spain’s population will be like in 50 years

The Bank of Spain report noted that “immigrants have high labour participation rates, generally above those of natives – in 2022, 70 percent and 56.5 percent, respectively.”

In three decades’ time, the INE expects Spain to have 14.8 million pensioners, 18 million Spanish nationals of working age and 12 million foreigners. To maintain the ratio, the Bank of Spain forecasts that the working immigrant population would have to rise by more than 25 million to a total of 37 million overall.

Of course, the arrival of 25 million working-age foreigners seems unlikely, if not impossible. To achieve this, around 1 million net migrants would have to enter Spain each year (discounting departures), a figure unprecedented in recent history. To put the figure in context, between 2002 and 2022 net arrivals in Spain reached five million, roughly five times less than what would be necessary to maintain the balance between workers and pensioners.

READ ALSO: ‘Homologación’ – How Spain is ruining the careers of thousands of qualified foreigners

Putting the economics aside, even if such an increase were statistically plausible, such a surge in net migration would be contentious both politically and socially. And it’s not even certain that increased migrant flows would be able to fill the gap in working age people and bolster public pensions: “The capacity of migratory flows to significantly mitigate the process of population ageing is limited,” the Bank of Spain warned in its report. 

What these projections suggest is that Spain’s public pension system will, in coming decades, likely have to be sustained by the contribution of fewer workers overall. This likely means higher social security payments. “Migratory flows have been very dynamic in recent years, but it does not seem likely that they can avoid the process of population ageing… nor completely resolve the imbalances that could arise in the Spanish labour market in the future,” the report stated.

The problem of ageing will also be transferred to the labour market and the types of jobs filled in the future. Increased migratory flows will soften the effect, but the labour characteristics of migrants coming to Spain may not match the job market in the coming decades. The jobs of the future, increasingly digital, will likely require qualifications that many of the migrants expected to arrive in the coming years do not have.

Consequently, the Bank of Spain suggests that “without significant changes in the nature of migratory flows, it does not seem likely that… [they] can completely resolve the mismatches between labour supply and demand that could occur in the coming years in the Spanish labour market.”

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AMERICANS IN SPAIN

EXCLUSIVE: What the new Spain-US social security deal means for Americans

The Local speaks to the Spanish government and tax experts to understand what the new social security and pensions agreement between the United States and Spain means for American workers, digital nomads and pensioners in Spain.

Published: 15 May 2024 11:10 CEST
EXCLUSIVE: What the new Spain-US social security deal means for Americans

In early April, the United States and Spain announced a new social security and pension agreement.

The first update to the bilateral agreement between the two countries since 1986 was announced by US Ambassador to Spain, Julissa Reynoso, and Spain’s Minister of Inclusion, Social Security, and Migration, Elma Saiz.

The official agreement is unpublished so The Local spoke with a representative from Spain’s Ministry of Inclusion, Social Security, and Migration as well as international tax experts to understand the agreement in more detail.

Key aspects of the agreement

The Ministry told The Local Spain that the agreement is a step towards, bolstering mobility between Spain and the United States by improving pension calculations and social security protections.

The agreement has to do with the accumulation of benefits and affects working Americans living in Spain. There are two main components; the first affects which system people pay into (Spanish or American) and the second maximises the amount people can collect from social security.
 
Regarding paying into social security, the new agreement extends the “posting period” from three years to five years, with the possibility of extending it to seven years.

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This is meaningful for US employees who are working in Spain and means that they can now pay into the US social security system, rather than the Spanish social security system for longer.

Whereas the employee contributions in Spain and the United States are similar, 6.4 percent in Spain and 6.2 percent in the United States, the rate that employers pay differs greatly. In the United States the employer pays 6.2 percent into social security, whereas in Spain they pay 31 percent.
 
Why does this matter? “Previously when Americans moved to Spain, US employers were cutting the amount that they paid in salary because the cost of employment went up so much”, Louis Williams, Co-Founder and CEO of Entre Trámites, told The Local Spain.

It’s also made employers hesitant to grant digital nomads an Employer of Record (EOR) which would allow American workers to be on a Spanish contract.

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In terms of collecting benefits, the representative from Spain’s Ministry of Inclusion, Social Security, and Migration says, “In the calculation of the Spanish pension there have been technical modifications that will benefit especially those people who developed their last working life in the United States, without this harming those who have worked in Spain immediately before requesting the benefit.”

In other words, under the new agreement, after calculating a person’s benefits under each country’s system, the recipient will be awarded the most beneficial of those two calculations.

Impacts for self-employed workers and digital nomads

According to the Ministry, “The agreement allows self-employed workers to temporarily move to the other State while maintaining their legislation, a possibility that was previously restricted only to employed workers.”
 
This has big implications for people who avoid moving to Spain because of the complicated social security contributions scheme, as they’ll now be able to continue paying US social security taxes (rather than Spanish) for up to seven years.
 
“The interesting thing is if this is extended to digital nomads because it would make the digital nomad visa more attractive,” says Williams.

“Why? Because if you’re posted by an employer (who can now avoid high Spanish social security taxes) you’re eligible for Beckham’s Law.” The law, which does not extend to autonomous works, can cap tax liabilities at 24 percent.
 
Being posted could make life much simpler, according to Elliott Locke, ACSI, co-founder of abroaden, a financial wellbeing and education start-up for people living abroad headquartered in Barcelona.

“The calculus is harder for freelancers given the different legal structures and methods for freelancing between the two countries. In many ways, if an American moves here to work remotely, it could be beneficial for them to have their US-based employer hire them on a local contract through an employer-of-record,” Locke told The Local.
 
In short, the new agreement could make it more attractive for U.S. companies to post employees in Spain, making them eligible for Beckham’s law and allowing autonomous workers to pay into the U.S. social security system, making it more beneficial and easier to be a digital nomad in Spain.

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Who benefits from the new agreement?
 
The people who will feel this new agreement the most are employers, digital nomads, retirees who have paid into both systems over the years, and finally, civil servants. “Spain has incorporated as possible beneficiaries of the Agreement those people who have contributed to the civil servant’s regime (passive class regime), who were excluded in the previous Agreement,” says the Ministry.
 
When can we expect the new agreement to come into force?

Don’t hold your breath; this is Spain after all, but we can expect the agreement to come into force within the next two years.

The deal has to pass through Congress before approval, which is likely why it has not yet been published. If things move quickly, people could expect to benefit within a year.

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