Spain Faces Rising Labor Tax Burden and Demographic Challenges Threatening Economic Competitiveness and Pension Sustainability

Spain is grappling with a significant rise in its labor tax burden alongside demographic pressures that threaten the economy and pension system. According to a recent Civismo report, Spain’s tax wedge on labor reached 41% in 2024, about six points higher than the OECD average, ranking it among the 15 countries with the highest labor costs in the OECD. This increase has not translated into income growth, as Spain’s per capita income stagnated at only 87% of the European average for three decades.

The average labor cost per worker stands at €3,256 monthly, with €840 attributed to social contributions and employment taxes—amounting to high costs for both employees and employers. Since 2015, increases in social security contributions were steep, with a 75% rise at the minimum contribution base. The new Intergenerational Equity Mechanism, set to continue through 2029, is expected to add to these costs. Real wages remain subdued, growing only 2-2.5% recently, failing to match inflation and eroding purchasing power. Additionally, industrial energy costs surged 45% since 2021, compounding competitiveness challenges.

Moreover, Spain faces a rapidly aging population that will deepen pension system strains. The OECD highlights that the dependency ratio of people aged 65 and older is projected to rise by 41% over 30 years, the fastest increase in the EU. This demographic shift results from retiring baby boomers and low birth rates, with life expectancy surpassing 84 years in 2024. By 2045, pension spending is forecasted to rise from 13.7% to 16.9% of GDP, the highest among 32 OECD countries analyzed.

The OECD recommends pension reforms such as extending the pension contribution calculation period and adjusting benefits according to life expectancy to enhance system sustainability. Yet, the Spanish government rejects these proposals. Minister of Social Security Elma Saiz criticized the OECD's report as outdated and insists no additional pension reforms are needed following recent GDP revisions.

With labor costs rising faster than wages and demographic challenges intensifying, experts warn that urgent reforms in Spain’s labor and fiscal frameworks are needed. These include simplifying social contributions and incentivizing productivity and innovation to safeguard economic competitiveness and the financial health of the pension system. Without such changes, the efficiency of expenditures to create jobs and sustain social welfare may decline, posing significant risks to Spain’s economic future.