Socioeconomic Effects of Pension Spending: Evidence from Spain

The purpose of this study is to provide broader understanding of the significant role that the pension system has in the Spanish economy by estimating the sectoral production, employment and income sustained by pensioners' consumption. Based on input-output tables by the World Input-Output Database and consumption data from the Household Budget Survey by the Spanish Statistical Office, a demoeconomic model is applied to quantify the direct impacts, indirect impacts from interindustry links and induced impacts from income-consumption connections over a nine-year period (2006–2014). Then, the factors driving the evolution of total output, employment and value added during such period have been examined by using structural decomposition analysis. The growing participation of consumption by pensioner households in final demand had proven crucial during the 2008 crisis to alleviate the negative trend in production and employment derived from the collapse in consumption suffered by the rest of households. Determining the underlying factors driving changes in both employment and income during the 2008 crisis can be of interest in political decision-making on the sustainability of the Spanish pension system. The results of estimating both the employment and income supported by pensioners' consumption reveal the significant stabilizing effect of the public spending on pensions, particularly during the 2008 crisis. The current Spanish approach of attaining the pension system sustainability by merely reducing social protection costs ignores the adverse consequences of a lower pensioners' demand. This paper addresses an alternative view in which pension spending is not considered a burden on economic growth but rather a means of improving the level of production and employment.