Spanish Minimum Pensions after the 2013 Pension Reform

Abstract

In this article we explore the consequences of exempting minimum pensions from the Pension Revaluation Index (PRI) introduced by the 2013 reform of the Spanish pension system and making their real value a constant share of per capita output instead. We find that this change essentially implies trading-off higher minimum pensions against a lower PRI -which reduces the real value of all other pensions- and against the higher consumption tax rates that are needed to finance them. When faced with these trade-offs, the optimal responses of the households in our model economy are to work shorter hours, to retire earlier, and to save less. They also consume less to avoid paying some of the higher consumption taxes. All this implies that preserving the real value of minimum pensions makes the growth rates of output smaller. We also find that this change compresses the range of pensions, and that as many as 48 percent of the retirees in our model economy collect the minimum pension in 2050. This share is 28 percentage points higher than the share of 2010. It also implies that pensions are more equally distributed because the bottom tail of the pension distribution collects a larger share of the total. Finally, we find that preserving the real value of minimum pensions brings about large welfare gains.