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PENSIONEXPENDITURE

SPANISH CASE

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Policy question

The aging of population has been the triggerwhich sparked off the highest expenditure inretirement pensions in the Spanish pay as yougo system, although this has not been the onlyvariable which has affected it. The slow growthof the population, the weakness of the jobmarket, and the increasing dependency ratio, arethe main drivers of our variable of interest.

Given this reality, does the government need toimplement any measure to keep that figureunder control?

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OTHERS FORECAST Population Pyramid 2010-2020 (INE)

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OTHERS FORECAST

Generational Replacement

Generational Replacement Ratio= Population 10-14 / Population 60-64

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OTHERS FORECAST

Population under 14 years (black) old and above 65 years old (grey)revolution:

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Variables

Our variable of interest is the amount of moneythat is going to be allocated to retirementpensions as a percentage of GDP, in the next 5quarters.

The covariates used are then GDP, LaborProductivity, Dependency ratio and Employmentrate. Among them, the Dependency ratio andthe Employment rate are treated as exogenous

variables. Productivity and GDP are classicalmacroeconomic variables, and difficult not to beclearly related each other, as well as any kind ofGovernment expenditure.

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OTHERS FORECAST

Dependency ratio (blue) vs. Employment rate* Productivity and Employment rate(blue) growth*

*.-ECOFIN *.-ECOFIN

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The Model

The model we finally used was a VAR with two lags as thevariables and their lags influence each other in the longterm.

In sample Out of sample

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FORECAST

LGP = 1.59*LGP(-1) - 0.49*LGP(-2) + 0.04*LGDPSA(-1)

- 0.02*LGDPSA(-2) - 0.02*LLPSA(-1) + 0.01*LLPSA(-2)

- 0.15 - 0.03*LRD - 0.02*LTE

GPF GDPF LPF

2011Q4 11.00% 271,462.69 35.06%

2012Q1 11.22% 273,263.01 35.04%2012Q2 11.46% 273,796.39 34.94%

2012Q3 11.74% 273,347.73 34.80%

2012Q4 12.04% 271,954.49 34.61%

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FORECAST

5 step ahead

.085

.090

.095

.100

.105

.110

.115

.120

.125

94 96 98 00 02 04 06 08 10 12

PE GP0

2011Q4 11.00%

2012Q1 11.22%

2012Q2 11.46%

2012Q3 11.74%

2012Q4 12.04%

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FORECAST

Other variables

80,000

120,000

160,000

200,000

240,000

280,000

94 96 98 00 02 04 06 08 10 12

GDP GDPF

16

20

24

28

32

36

94 96 98 00 02 04 06 08 10 12

PRODUCTIVITY LPF

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Policy Recommendation

As we can see in the last slide, the trend is accelerating dangerously,both because of a drop in the level of GDP and the steady growth of thepensions expenditure.

Anyway we have to note that this forecast is very short time and this isan exercise to be done every year at least, because as we can see, unless

any other policy is implemented regarding the increase of laborproductivity, or reducing the unemployment rate or better inmigrationpolicies, the figure is going to get worst.

The forecast shows that the Spanish government should accomplish assoon as possible this problem, either by implementing policies toincrease the income part of the ratio (GDP, productivity, employment),or/and to decrease the amount to expend in pensions. The first policiesare difficult because they do not have an immediate effect, while thesecond ones are short term. Longer retirement age and no earlyretirement option are the quick ones, but with possible social sideeffects.

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ANEX Impulse Responses

-.005

.000

.005

.010

.015

.020

.025

1 2 3 4 5 6 7 8 9 10

Response of LGP to LGP

-.005

.000

.005

.010

.015

.020

.025

1 2 3 4 5 6 7 8 9 10

Response of LGP to LGDPSA

-.005

.000

.005

.010

.015

.020

.025

1 2 3 4 5 6 7 8 9 10

Response of LGP to LLPSA

-.03

-.02

-.01

.00

.01

.02

1 2 3 4 5 6 7 8 9 10

Response of LGDPSA to LGP

-.03

-.02

-.01

.00

.01

.02

1 2 3 4 5 6 7 8 9 10

Response of LGDPSA to LGDPSA

-.03

-.02

-.01

.00

.01

.02

1 2 3 4 5 6 7 8 9 10

Response of LGDPSA to LLPSA

-.03

-.02

-.01

.00

.01

.02

1 2 3 4 5 6 7 8 9 10

Response of LLPSA to LGP

-.03

-.02

-.01

.00

.01

.02

1 2 3 4 5 6 7 8 9 10

Response of LLPSA to LGDPSA

-.03

-.02

-.01

.00

.01

.02

1 2 3 4 5 6 7 8 9 10

Response of LLPSA to LLPSA

Response to Cholesky One S.D. Innovations 2 S.E.