The OECD warns of the impact of the pandemic on youth pensions | Economy


A waitress attends a terrace in the center of Seville in November.
A waitress attends a terrace in the center of Seville in November.Paco Puentes (THE COUNTRY)

The countries of the Organization for Economic Cooperation and Development (OECD), including Spain, They have launched extensive safety nets in the face of the recession caused by the pandemic. And unless pressures on public finances persist in the wake of the new waves, they have been able to protect current pensioners. However, the Paris-based organization believes that the crisis caused by COVID-19 will have an impact – “small” but “visible” – on the benefits that young people will receive when they retire, since they have been “seriously affected by the economic and social impacts of the crisis ”and could affect their careers if the pandemic leaves“ scars in the longer term ”. This is reflected in a report that also indicates that Spain is among the countries facing “strong demographic challenges” that “will affect the adequacy” of income for retirees, “financial sustainability” or both. The OECD proposes automatic adjustment mechanisms, although it believes that the Pension Revaluation Index designed by the PP Government in 2013 failed to mask a continuous reduction in benefits in real terms (discounted for inflation).

The pandemic melted the deficits and debt of the world’s major economies. The OECD report Pensions at a glance 2021 (Pensions at a glance 2021) points out that governments saved the pensions of current recipients and probably also of many workers thanks to the mechanisms of protection and retention of employment (the ERTE, in Spain). In the short term, covid-19 has had a double face for the pension system: the excess mortality of covid-19 has reduced spending on benefits for the population over 65 years of age by 0.8% in the all OECD countries between January 2020 and August 2021, but the birth rate has also fallen – and in the case of Spain, “significantly” – due to greater health and economic uncertainty. Even so, the immediate balance for the States was negative, since they suffered high pressure on their public coffers as the recession caused by the pandemic sank their economies. However, the OECD estimates that all these tensions will ease and that the impact in the medium term will be “modest”, although not zero for all countries.

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However, the OECD does believe that the pandemic will have an impact on youth pensions. It will not be capitalized, but it will be noticeable. “Entering the labor market has become much more difficult during the crisis and the career prospects of the younger generations have worsened. The impact on the future pensions of today’s young people is expected to be small, but visible in four decades, when they have retired ”, he points out. In other words, the blow is both for those who work and for those who are waiting to enter the labor market. Those employees, the document points out, are in the “most affected” sectors, such as the hotel and food industry. In addition, it underlines that youth employment has not yet recovered its pre-pandemic levels and recalls that their access to unemployment benefits is “limited.” Those looking for their first job are delayed in their access to a labor market that offers lower remuneration. “In addition to the immediate effects, the delay in starting the career and the reduction in income will also affect future pensions,” the document adds.

There is another trend, however, that has occurred in the last decade on the fringes of the pandemic: the population continues to age. The agency points out that the pace at which it will do so in the next 20 years will also continue to accelerate. In some countries it will do so more than in others. In Greece, Japan, Latvia, Lithuania and Poland, the working-age population will decline by at least a third by 2060. But the document notes that Estonia, South Korea, Portugal, Slovakia, Slovenia and Spain. The OECD estimates that by 2035 pension spending will increase by 3.5% of Gross Domestic Product (GDP).

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Need for “political consensus”

The Paris-based body believes that automatic pension adjustment mechanisms are “crucial” to “help deal with the impact of aging.” However, he warns that they must be “politically sustained over time, also when governments change, to achieve their short-term and long-term objectives.” Furthermore, the OECD believes that “poorly designed” systems can generate opposition and end up being abolished or reformed. “Mechanisms designed to mask benefit cuts in real terms are more likely to fail as they can put greater pressure on policy makers to soften their impact or even abandon it altogether,” the report reads.

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There the OECD gives the example of Spain, which in 2013 introduced the Pension Revaluation Index (IRP) “without a broad political consensus”. The objective of this index was that pensions would increase according to the financial health of Social Security through a complex formula that took into account income and expenses within an 11-year cycle, although with two limits: pensions could never go up less than 0.25% – regardless of whether the formula gave a negative result – nor more than the increase in the CPI plus half a percentage point. The OECD recalls that, each year, between 2014 and 2017, pensions were indexed at 0.25% and the projections indicated that it was very likely that this increase would be persistent in the future given the difficulties foreseen for Social Security.

Following protests from pensioners, pensions were re-linked to inflation, which translates into “significantly higher rates” and the IRP was suspended. “This example illustrates not only the need for political consensus, but also that the introduction of a mechanism that leads to a steady decline in pensions in real terms during retirement is questionable, as retirees have little chance of adjusting their income, for example, working more ”. The institution also recalls that the suspension of this index had an impact on the sustainability factor, which was never applied.

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George Holan

George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.

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