Practical keys to the new pension reform (RDL 2/2023, 16 Mar.)

The most relevant aspects of this reform:

1 - Increase in the maximum contribution bases.

The main objective of this change, like that of the reform of the self-employed contributions system approved last year and which came into force in January 2023, is to increase the revenue received by the system in order to make it sustainable.

To this end, the maximum contribution bases will be increased gradually, i.e. year by year. This process will take place between 2024 and 2050, with a fixed amount of 1.2 percentage points added to the annual CPI percentage.. In other words, without reaching an announced general "capping" of the maximum bases, the accumulated annual increase will be significant. With this formula, the maximum bases are expected to increase by 38 % until 2050.

In return, it seems to us, maximum pensions will be revalued annually in line with inflation, plus an additional increase of 0.0115 cumulative points each year until 2050. For that year, and until 2065, additional increases are proposed.

2 - Solidarity quota for higher incomes/wages.

For the literal expression of the Minister of the sector, "... inject more revenue into the system and meet the challenge of ageing".In addition, social security also provides for a solidarity contribution for higher salaries that are currently not fully paid, as they exceed the maximum contribution rate.

It will be from 1 % in 2025 (applicable only to the part of the salary that does not contribute, because it is above the maximum base for each year) e will increase by 0.25 points per year to reach 6 % in 2045.

3 - Gradual increase of the Intergenerational Equity Mechanism (IEM).

Along the same lines, the MEI currently in force and applicable from January 2023 - derived from the 4th final provision of Law 21/2021, 28 Dec - will be progressively increased.

Instead of the current 0.6 % (0.5% to be paid by the company and 0.1% to be paid by the employee), this percentage will be will double to 1.2 %, by 2050. This will increase the MEI by one tenth of a percentage point each year until the latter percentage is reached.

4 - Increase in minimum pensions.

With this increase in income, as can be seen in the three previous points, there will be a direct increase in costs that companies will have to bear - hence the employers' refusal to sign any agreement in this respect - the Social Security "expects" to assume improvements in minimum pensions.

This is intended to ensure that the These pension amounts converge to 60 % of national median income -like what was intended for the SMI. This will be done "taking as a reference the evolution of the minimum pension with a dependent spouse, which would reach between 2024 and 2027 60 % of the median income of a two-adult household".The Ministry sources have explained.

5 - Increase in non-contributory pensions.

In addition to minimum pensions, the government also plans to raise non-contributory pensions with this reform. They would rise to 75 % of the poverty threshold calculated for a single-person household by 2027.

6 - Solution to contribution gaps.

There is already a system in place to cover contribution gaps - periods when workers contribute less to the system because of breaks in their career - but this reform aims to strengthen this concept.

Thus it is maintained that contribution gaps are compensated with 100 % of the minimum base for the first 48 months (four years), and with 50 % of the minimum base from the 49th month, adding for employed women 100 % of the minimum base between the gap month 49 and 60 (up to the fifth year) and 80% of the minimum base between the 61st and 84th month (from the fifth to the seventh year).

7 - Against the gender gap.

Measures are also taken to address the gap between men's and women's pensions. Thus, the supplement against this gap will be increased by 10 % in 2024 and 2025, which will be additional to the annual revaluation already foreseen.

8 - Dual computing model for the next 20 years.

The main stumbling block in the negotiation, the calculation period (the years of contributions used to calculate the amount of the pension), has been resolved by giving the a choice for the pensioner between two systems. Namely:

• The pensioner will be able to take advantage of a calculation period of 29 years, excluding the 24 months (2 years) of worst contribution. This possibility will be progressively deployed over 12 years from 2026.
• Or you can choose to stay in the current 25-year system.

Normally, increases in the calculation period cause a reduction in the pension, since, by including more years in the calculation, taking into account that at the beginning of the working career the salaries are lower, the result is a contraction in the amount. The possibility of pensioners opting for the status quo, for the calculation of 25 years, dissipates this possibility for those who have had irregular working careers, with periods without contributions. These are the government's "justifications" for maintaining the reference period, which is a highly controversial issue.