The reform of the pensions enters from this Monday in a new stage. After the reform of August 2021 that linked benefits to the Consumer Price Index (CPI) and the reform of self-employed contributions that was resolved in July 2022, the Ministry of Inclusion, Social Security and Migration addresses a third round of dialogue under the premise of guaranteeing the solvency of the system.
Demographic trends are, according to the annual report of the Bank of Spain 2021, one of the main factors that put pressure on the so-called “pension piggy bank”. The arrival of the baby boom generation at retirement age, a group that includes 7.7 million people who are now between 44 and 64 years old, the increase in life expectancy or the decrease in rates birthrates are some of the most serious challenges for the sustainability of pensions.
August 2021: Benefits are linked to the evolution of the CPI
In the first part of the reform, pensions were linked to the Consumer Price Index (CPI). In this way, if the cost of living increases, pensions will also do so. In cases of negative inflation—that is, if prices fall—pensions are not cut but would remain frozen. The amount of pensions is updated annually, taking the average CPI of the previous year as a reference. For example, in the case of 2023 pensions, they will be revalued taking into account the average inflation for the period from December 2021 to November 2022.
One of the problems that this reform is trying to correct is the gap between the legal retirement age (66 years in 2022) and the effective age at which the average Spaniard retires, which is slightly below (64, Eight years). To avoid this gap, a double mechanism was established: it sought both to penalize early retirements and to encourage delays in retirement. Incentives were established for people who delayed their retirement, such as a 4% pension increase for each extra year worked.
The other side of the coin is early retirement. To access it, the worker must have accumulated at least 35 years of contributions, which allows him to advance his retirement two years. The current reform attempts to discourage people from availing themselves of this mechanism by cutting their initial pension. If a worker with less than 38 years of contributions wanted to advance his retirement by 24 months, his pension would be cut by 21%. Before the reform, the penalty only reached a cut of 16%.
The August reform also contemplated the repeal of the sustainability factor, a mechanism introduced in 2013 to compensate for the effects on Social Security spending derived from the increase in life expectancy. The sustainability factor acted on the benefits, reducing their initial amount to alleviate the expense of the Social Security Reserve Fund. For example, if life expectancy increased by 5%, the initial pension was reduced by 5%.
In substitution of the sustainability factor appears the Intergenerational Equity Mechanism, which is charged on the contributions of the workers and not on the amount of the pensions. Employees will contribute an additional 0.6% contribution for a period of 10 years. Of this figure, 0.5% will be contributed by companies and 0.1% by workers. This increase could allow the Social Security Reserve Fund to accumulate capital of around 2.5% of GDP in 2032, according to the Bank of Spain.
Finally, the transfer of the so-called “improper expenses” to the State was also approved in August. Social Security stopped assuming, for example, the payment of non-contributory pensions or supplements to increase benefits that did not reach the minimum amount.
July 2022: Reform of self-employed contributions
In the second round of reforms, an agreement was reached with the self-employed. This group receives retirement pensions lower than those of employees, with an average pension of 854 euros, compared to the 1,494 received by the average of workers affiliated to the general scheme, according to data from the Ministry of Inclusion, Social Security and Migration.
To try to increase your contribution level and match it with your real income level, the Government proposed a table of 15 yield brackets with installments ranging from 230 euros to 500 in 2023; from €225 to €530 in 2024; and from 200 euros to 590 euros in 2025. In this way, it is a matter of gradually increasing contributions to bring the contribution bases closer to the real earnings they receive. According to data from the self-employed organizations, two out of three quote for the minimum base (just over 960 euros), hence their benefits are lower. In the case of the self-employed with lower incomes, the aim was to reduce the minimum amount to be paid.
September 2022: Social agents and the Government resume negotiations to complete the reform
The third phase of negotiations begins with two controversial proposals on the table: progressively raising the maximum pension while eliminating the top of the contribution base above and modifying the computable periods to calculate the contribution bases. The elimination of the cap on maximum contributions would be accompanied by a rise in the highest pensions, but it would provide Social Security with an injection of income in the short term that —according to calculations by the Minister of Social Security, José Luis Escrivá, “will increase income of the system in the 1930s and 1940s, which is where the system will suffer.”
The second proposal that is on the table is to change the computable periods, on which the amount that the pensioner will receive is then calculated. This is determined on the basis of the years of contributions and the amounts paid to Social Security in that period. To receive a retirement pension, you must have contributed for a minimum of 15 years. And in order to do so at the age stipulated by law, they must reach 25. At this point, Escrivá stated this Monday that the number of years of contributions that are taken into account to calculate the pension will not be extended to 35, but he has nuanced that it is necessary to act on the period for calculating the pension.
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