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Article | Global News Briefs

Spain: State pension reforms — cost versus sustainability

By Pilar Garcia-Aguilera | April 28, 2023

Spain enacts changes to its pension system to finance future needs by increasing the retirement age and boosting contribution levels for both employers and employees.
Retirement|Health and Benefits|Ukupne nagrade

Employer Action Code: Act

New legislation (Decree 2/2023) is intended to improve the social security system’s sustainability and benefits adequacy to cope with an aging population and rising number of pensioners by establishing a reserve fund, introducing a new social solidarity contribution, and steadily increasing the monthly earnings ceiling for calculating contributions and benefits at a rate higher than inflation, among other things. According to government data, retirees currently make up a fifth of the population, projected to rise to 30% by 2050.

Key details

  • A new intergenerational equity mechanism (i.e., a reserve fund) will support the cost of annual increases in social security retirement, survivors’ and disability pensions to ensure that the system can continue indexing annual increases of pensions in payment to changes in the consumer price index (CPI). The fund will be financed in part by employer and employee contributions of 0.5% and 0.1% of covered pay, respectively, in 2023, increasing one-tenth of a percentage point per year to reach 1.2% (1.0% for the employer and 0.2% for the employee) for the period 2029 – 2050.
  • The monthly earnings ceiling (4,495.50 euros in 2023) for calculating contributions and benefits will increase each year by 1.2% plus the change in CPI for the year prior, during the period 2024 – 2050.
  • An additional social security solidarity contribution will be introduced from January 1, 2025, levied on the employer and employees at progressive total rates of 0.92% on earnings between 100% and 110% of the ceiling, 1.0% on earnings from 110% to 150% of the ceiling, and 1.17% on earnings exceeding 150% of the ceiling. These rates will gradually increase to 5.5%, 6.0% and 7.0%, respectively, by 2045. The employer and employee shares of this total solidarity contribution will be based on their proportionate shares of the current retirement contribution rate on pay up to the ceiling (23.6% employer, 4.7% employee).
  • From 2037, pensionable earnings for calculating the retirement pension for new retirees will be based on either the last 25 years (the current standard) or the last 29 years of the claimant’s insured employment period and discarding the worst two years, whichever is more favorable for the employee. This reform will be gradually implemented from 2026, annually increasing the current standard by two months until it reaches the definitive period in 2037.

Employer implications

The reforms are part of a variety of measures recently introduced by the government to improve the system’s sustainability and benefits adequacy, including discouraging early retirement, gradually increasing normal retirement age and the minimum period of insured employment to qualify for a full pension. The latest reforms are aimed squarely at the system’s financing, with the brunt of the additional costs met by a higher earnings ceiling, the reserve fund and social solidarity contributions, resulting in higher costs for employers and employees – in particular with respect to highly paid employees. Around half of employers surveyed by WTW offer supplemental retirement benefits. New pension and tax laws introduced in 2022 are intended to boost retirement plan participation by providing new employer tax breaks and relaxing employee plan contribution limits (see Global News Brief: New tax incentives, sectoral pension and funding options) and will likely increase the percentage of the population with an occupational pension; however, hard euro caps on the amount of contributions limit tax incentives for retirement benefits for highly paid employees.


Pilar Garcia-Aguilera

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