Key points: What you need to know about Spain's new pension reform
A second phase of reforms to the Spanish pension system has been agreed between the government and unions ahead of the retirement of the baby boom generation in the 2030s and 2040s. Here's all you need to know about the key changes.
Another phase of reforms to the Spanish pension system has been agreed by the government and Spain's major trade unions, the CCOO and UGT.
The wide-ranging changes, the underlying thrust of which is to prepare the system for the impending retirement of the baby boomer generation throughout the 2030s and 2040s, also increases minimum pensions rates, increases maximum contributions employers have to make, as well as implementing a 'dual system' to calculate the pensions of non-conventional careers and make sure people, the self-employed for example, do not lose out.
Introduced between 2024 and 2027, the minimum contributory pension in Spain will rise above inflation with an increase of 22 percent for those with a dependent spouse, meaning it will go from €966.20 to €1,178.50 per month.
The text of the reforms, which has been rejected by employers associations, was agreed between the government and unions on Wednesday and is expected to be approved in a Council of Ministers meeting on Thursday 16th.
Employers and business groups, including the CEOE, Cepyme and ATA, rejected the reforms because, they said in a joint-statement, it "is regressive in its entirety because it means more years of work, more tax effort and less pension."
Employers are upset because the increases will largely be financed by them, and put simply the changes can by described as: the Spanish government increasing employers' pensions contributions in order to finance the impending pension deficit of retiring baby boomers.
READ ALSO: Older and more diverse - What Spain’s population will be like in 50 years
However Spain's Inclusion Minister, José Luis Escrivá, has defended the reforms, stating that contributions "will remain below those in other European countries," as well as helping to "maintain the Spanish economy's level of competitiveness."
Given the combination of Spain's ageing population and decreasing birthrates, by 2050 Spain will spend the third most in the European Union on its pension system, according to forecasts from the Bank of Spain.
Between a new government "solidarity tax" on high salaries, an increase in the Intergenerational Equity Mechanism (MEI), and the gradual increase in the maximum contribution base, it is thought that by the time all the reforms are implemented the Spanish social security will collect around €15 billion each year.
READ ALSO: The new tax all workers in Spain will pay in 2023
Here are the key takeaways from the changes.
Minimum pensions
The minimum contributory pension in Spain will increase by 22 percent, from €966.20 to €1,178.50 per month for those with a dependent spouse.
The reforms also establish that minimum contributory pensions (with a dependent spouse) now must be worth 60 percent of the median income of a two-adult household, which will mean €16,500 per year in 14 payments in 2027.
Equally, minimum non-contributory pensions will now have to be 75 percent of the individual poverty threshold, which in 2027 would be about €8,300 per year or about €592 per month, compared to the current minimum rate of €457.30.
READ ALSO: Spain’s over 65s exceed 20 percent of the population for the first time
Maximum contributions
Maximum pensions are to increase and will be reevaluated on a yearly basis, taking into account the annual CPI plus an additional increase of 0.115 percent per year until 2050, which will mean an increase of approximately 3 percent.
From 2051 until 2065 there will be additional increases so that at the end of the period, in 2065, the maximum pension will have increased cumulatively by 20 percent.
Increasing the maximum contribution bases is a flagship policy of Escrivá's reforms. At present in Spain, there is a ceiling above some salaries are exempt from taxation. Specifically, the Spanish tax office only taxes salaries up to €4,495.50 per month, and the reforms aim to progressively raise that ceiling in order to obtain more income.
According to the government's own calculations, there are around 1.2 million workers throughout Spain who do not pay contributions for the full amount of their salary.
Dual model calculations
The reforms also introduce a 'dual model' calculation, meaning that pensions can be calculated either with the previous 25 years of contributions or with 29 years of contributions, of which the two worst, meaning lowest amount of contributions, can be excluded, meaning that in practice the calculation in this second case will be 27 years.
This new option will be introduced progressively, from 2027 to 2038.
From 2027 until 2040, it will be possible to choose between the two options, while between 2041 and 2043 the 25-year option will rise at the rate of six months per year, to 26.5 and it will still be possible to choose. From 2044 pensions will only be calculated with 27 effective years of contribution model.
The self-employed
A so-called 'observatory' body will also be created to improve the effectiveness and coverage of pensions for self-employed workers, as well as the introduction of periods without contribution obligations, especially when the self-employed are not working.
Equally, students who undertake internships in companies or other institutions will be integrated into Spain's social security system.
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Another phase of reforms to the Spanish pension system has been agreed by the government and Spain's major trade unions, the CCOO and UGT.
The wide-ranging changes, the underlying thrust of which is to prepare the system for the impending retirement of the baby boomer generation throughout the 2030s and 2040s, also increases minimum pensions rates, increases maximum contributions employers have to make, as well as implementing a 'dual system' to calculate the pensions of non-conventional careers and make sure people, the self-employed for example, do not lose out.
Introduced between 2024 and 2027, the minimum contributory pension in Spain will rise above inflation with an increase of 22 percent for those with a dependent spouse, meaning it will go from €966.20 to €1,178.50 per month.
The text of the reforms, which has been rejected by employers associations, was agreed between the government and unions on Wednesday and is expected to be approved in a Council of Ministers meeting on Thursday 16th.
Employers and business groups, including the CEOE, Cepyme and ATA, rejected the reforms because, they said in a joint-statement, it "is regressive in its entirety because it means more years of work, more tax effort and less pension."
Employers are upset because the increases will largely be financed by them, and put simply the changes can by described as: the Spanish government increasing employers' pensions contributions in order to finance the impending pension deficit of retiring baby boomers.
READ ALSO: Older and more diverse - What Spain’s population will be like in 50 years
However Spain's Inclusion Minister, José Luis Escrivá, has defended the reforms, stating that contributions "will remain below those in other European countries," as well as helping to "maintain the Spanish economy's level of competitiveness."
Given the combination of Spain's ageing population and decreasing birthrates, by 2050 Spain will spend the third most in the European Union on its pension system, according to forecasts from the Bank of Spain.
Between a new government "solidarity tax" on high salaries, an increase in the Intergenerational Equity Mechanism (MEI), and the gradual increase in the maximum contribution base, it is thought that by the time all the reforms are implemented the Spanish social security will collect around €15 billion each year.
READ ALSO: The new tax all workers in Spain will pay in 2023
Here are the key takeaways from the changes.
Minimum pensions
The minimum contributory pension in Spain will increase by 22 percent, from €966.20 to €1,178.50 per month for those with a dependent spouse.
The reforms also establish that minimum contributory pensions (with a dependent spouse) now must be worth 60 percent of the median income of a two-adult household, which will mean €16,500 per year in 14 payments in 2027.
Equally, minimum non-contributory pensions will now have to be 75 percent of the individual poverty threshold, which in 2027 would be about €8,300 per year or about €592 per month, compared to the current minimum rate of €457.30.
READ ALSO: Spain’s over 65s exceed 20 percent of the population for the first time
Maximum contributions
Maximum pensions are to increase and will be reevaluated on a yearly basis, taking into account the annual CPI plus an additional increase of 0.115 percent per year until 2050, which will mean an increase of approximately 3 percent.
From 2051 until 2065 there will be additional increases so that at the end of the period, in 2065, the maximum pension will have increased cumulatively by 20 percent.
Increasing the maximum contribution bases is a flagship policy of Escrivá's reforms. At present in Spain, there is a ceiling above some salaries are exempt from taxation. Specifically, the Spanish tax office only taxes salaries up to €4,495.50 per month, and the reforms aim to progressively raise that ceiling in order to obtain more income.
According to the government's own calculations, there are around 1.2 million workers throughout Spain who do not pay contributions for the full amount of their salary.
Dual model calculations
The reforms also introduce a 'dual model' calculation, meaning that pensions can be calculated either with the previous 25 years of contributions or with 29 years of contributions, of which the two worst, meaning lowest amount of contributions, can be excluded, meaning that in practice the calculation in this second case will be 27 years.
This new option will be introduced progressively, from 2027 to 2038.
From 2027 until 2040, it will be possible to choose between the two options, while between 2041 and 2043 the 25-year option will rise at the rate of six months per year, to 26.5 and it will still be possible to choose. From 2044 pensions will only be calculated with 27 effective years of contribution model.
The self-employed
A so-called 'observatory' body will also be created to improve the effectiveness and coverage of pensions for self-employed workers, as well as the introduction of periods without contribution obligations, especially when the self-employed are not working.
Equally, students who undertake internships in companies or other institutions will be integrated into Spain's social security system.
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