The Toledo Pact is a political agreement reached in 1995 between the main Spanish parties to guarantee the sustainability and stability of the public, pay-as-you-go pension system (one in which active workers finance the pension benefits of those who are already retired). This agreement, which became a parliamentary commission and has been in force for 30 years now, has laid the foundations, on the basis of political and social consensus, for all the pension reforms carried out in Spain over the last three decades and is, without a doubt, and according to all those who participated in these reforms, a success story.
However, many of the architects of the pact, coming from both the PP and the PSOE and who have been responsible for Social Security at different times during these 30 years, gathered this Wednesday in Madrid, in an information session organized by the Santalucía Institute on the occasion of this anniversary, and issued a warning: the latest pension reforms carried out by the current socialist government have deviated from the spirit of the Toledo Pact because they do not guarantee intergenerational balance. With this they warn that the gap between public resources allocated to pensioners and workers is increasingly wider and benefits to a greater extent those who are already retired from the world of work.
“The Toledo Pact is an inter-party commitment, which is signed by political parties and seeks to eliminate from the electoral discourse issues which, due to their importance, transcend a legislature. With this pact this has been achieved: eliminating pensions from the electoral struggle, and that is no small feat”, congratulated Octavio Granado, Secretary of State for Social Security in the socialist governments of José Luis Rodríguez Zapatero and Pedro Sánchez, on Wednesday.
This result is shared by all those who have intervened in the pension reforms of recent times, even if nuances soon arise. “The Toledo Pact has played a very important role, but the (political) decisions taken since 2020 – in reference to the reforms carried out under the Sánchez governments – have forgotten the initial philosophy of the pact. We must not only look for a system that offers sufficient benefits, but also take care of the common good of the whole society, not only of pensioners, also of those who now finance it (workers),” said the former director general of social security regulation of Mariano Rajoy’s government.
As García explained, between 1995 and 2023, public spending increased by 1.3 points of GDP while pension spending increased by 3.4 points, “which indicates that there was a clear preference on the part of legislators to protect pension spending and the rest were not as careful.”
This economist, currently a professor at Rey Juan Carlos University, sees a turning point in the change in philosophy of the Toledo Pact in his 2020 report, when it was decided to keep the Spanish pension replacement rate among the highest in Europe. Specifically, the pension in Spain represents 77.2% of the final salary, compared to an average of 44.5% in Europe. “And this replacement rate is so high because in Spain, for every euro paid (to Social Security) after updating it with the nominal GDP, 60% more is granted in the pension,” he indicates. To this he also adds, “that the revaluation of that pension is guaranteed regardless of what happens in the world. For example, in 2023, the 8.4% update, due to the inflationary crisis, meant an increase in spending of 15 billion, which is all that is spent in a year on family policies and double what is invested in housing policies”.
According to this, the latest reforms since 2020, which have opted for increasing income, without preventing pension spending in relation to GDP from growing between 3.5 and 5 points until 2050, “break the spirit of the Toledo Pact because only the well-being of one party was opted for and the other was told that it must tolerate this political option with a lower disposable income”, concludes García.
The weight of the new generations
This view is shared by the socialist side. Specifically, by Valeriano Gómez, former Minister of Labor and Emigration of the PSOE with José Luis Rodríguez Zapatero and architect, together with Octavio Granado, of the most extensive reform in recent times (that of 2011), in which the legal retirement age was progressively postponed from 65 to 67 years, access to 100% of the pension was made more restrictive and the contribution period was extended from 15 to 25. calculation of the amount of pension benefits. “The reforms have made the system more sustainable, but, in parallel, society and demographics are changing. And it is true that the system does not guarantee that the new generations will carry a great burden,” agreed Gómez.
For this reason, the former socialist leader believes that “if serious mistakes are not made, the Toledo Pact will last over time and will have to promote parametric reforms (which are those aimed at changing the formula for calculating pensions)”. These changes were precisely the ones that rejected Sánchez’s Social Security ministers, José Luis Escrivá and Elma Saiz, who basically opted for an increase in the income share without touching the increase in spending. “It would have been positive if the latest reform had been accompanied by spending measures,” admitted Gómez. Although, at this point, he justified that this was not done “because it had to be agreed within the government coalition”.
On the other hand, Rodríguez Zapatero’s former Minister of Labor expressed himself in favor “of having a sustainability factor soon so that there is a rule that incorporates longevity into the pension calculation system”. This factor was created by the PP pension reform in 2013 and was eliminated in 2020 with the consent of the Toledo Pact, without even having started to be applied. This popular reform also introduced a revaluation factor (commonly known as 0.25%, because that was what pensions would be updated while the system was in deficit) which was also replaced by the automatic revaluation of pensions with the CPI in 201. Gómez was in favor of the existence of these two factors, but “a much simpler revaluation factor and a more complex sustainability factor should have been designed”.
In any case, he argued why “we should not seek a rigorous annual revaluation even with prices, but rather the constitutional mandate that pensioners maintain purchasing power, because pensioners no longer have the ability to maneuver to improve their income.” If an annual revaluation could be done with the CPI, for example, maintaining purchasing power for a period longer than one year, which was also taken into consideration by the Toledo Pact and was rejected in the latest reform.
Liquidity and capital imbalance
For his part, another former Minister of Labor who played an important role in the development of pension reforms since the existence of the Toledo Pact, first as Secretary of State for Social Security and then as portfolio holder, was the popular Juan Carlos Aparicio. This chemist turned manager of the pension system is proud to have given a social content to the Toledo Pact, giving an important weight to social agents in this consensus, even if he agrees in underlining the danger of the growing gap between pensioners and workers. “Now I see the intergenerational contract at risk; passive and active Spain must be more balanced and there cannot be, as currently happens, an imbalance either in terms of liquidity or assets”, complained Aparicio.
Both this former minister of the PP and Valeriano Gómez of the PSOE also agree on the need for the next pension reform to address, among other issues, the extension of the calculation period for setting the pension amount to the entire working life. Likewise, Aparicio (PP) and Granado (PSOE) agreed on the need to “rethink” the current conception of widow’s pension and provide a solution to the growing expenditure on temporary disability.
