Spain's new social security law, enacted on August 1, increases the retirement age, the number of years of contributions required for a pension, and incentives for workers to remain in the labor force past retirement age. Most of the new rules will be implemented gradually beginning in 2013. The law also introduces an adjustment mechanism to the public pension system in 2027 to help control spending. Pension reform is part of the austerity measures the country is undertaking to reduce the government deficit. According to Eurostat, Spain's 2010 government deficit was about 9 per cent of gross domestic product (GDP) compared with 6 per cent on average across the euro zone.

Background

Spain has a single pillar earnings-related, pay-as-you-go public pension system that provides old-age, survivors, and disability benefits. A noncontributory means-tested benefit, financed by general revenues, is provided to individuals aged 65 or older who do not qualify for a contributory benefit. At present, a worker aged 65 or older may retire with at least 15 years of contributions, including at least 2 years of contributions in the past 15 years. An early old-age pension is paid to persons involuntarily unemployed beginning at age 61 with at least 30 years of contributions. In addition, workers eligible for retirement, who switch from full-time to part-time employment may receive a partial pension. (The employer pays a reduced contribution on behalf of those workers.) Finally, a full old-age pension may be deferred from age 65 until age 70. That benefit is increased by 2 per cent for each year of deferral and by 3 per cent if the worker has at least 40 years of contributions.

Pension reform since 1995 is based on the Toledo Pact, signed by all political parties and the unions who commit to make necessary changes to maintain the country's public pension system. The first set of changes to the system through the Toledo Pact created a social security reserve fund in 1997 to help finance public pension deficits. At the same time, the number of years required for a public pension was raised and benefit adjustment according to increases in the consumer price index was introduced. Over the past decade, reforms further increased the minimum number of years required for a full retirement benefit and created penalties for early retirement and incentives to remain in the labor force beyond age 65.

Demographics and pension expenditures

The rapid aging of the population coupled with the system's relatively generous benefits are predicted to cause a significant financial burden on the system within the next 40 years. Spain's current older subpopulations (aged 65 or older and aged 80 or older) as a percentage of the total population are very close to the average among all European Union (EU) member countries. However, by 2050, Spain is projected to have a much older population than the EU member countries as a whole. The same comparison applies to the dependency ratio (see Table 1). In addition, the Organisation for Economic Co-operation and Development (OECD) calculates the gross replacement rate of a median earner in Spain (entering the labor force in 2008) as 81.2 per cent, significantly higher than the OECD average of 57.3 per cent. In 2010, expenditures on earnings-related public pensions accounted for about 10 per cent of GDP. If there were no changes to the public pension system, the OECD estimates that pension expenditures could reach 15.5 per cent of GDP by 2050, compared with 11.4 per cent among OECD countries.

2011 Pension Reform

Spain's latest pension reform addresses these demographic challenges and focuses on parametric changes to the country's social security programs.

Retirement benefits

Beginning January 1, 2013, the new social security law will include the following:

- An increase in the normal retirement age from 65 to 67 by 2019-1 month per year until 2018 and then 2 months per year until 2027.

- An increase in the number of contribution years needed for a full pension, from 15 years to 25 years by 2022. The minimum remains at 15 years; however, a worker with 15 years of contributions will only receive 50 per cent of the full pension.

- An increase in the number of contribution years required for workers with long careers, from 35 to 38.5 years by 2025. The retirement age for those workers remains at age 65.

Beginning in 2027, a "sustainability factor" will be introduced to the system that adjusts "the relevant parameters of the system" to changes in life expectancy every 5 years (no additional details are available).

Table 2 shows the government's estimates of how much the measures related to retirement age, the required number of contribution years, and the sustainability factor will reduce pension spending. The OECD expects the increase in retirement age and contribution years to lower the replacement rate to 73.9 per cent of previous earnings.

The law also allows voluntary early retirement (a reduced benefit) beginning at age 63 with at least 33 years of contributions. Also, in "crisis situations" (such as layoffs that are due to economic conditions or the death, retirement, or disability of a business owner) a worker with 33 years of contributions may retire at age 61. While partial retirement will be permitted for workers aged 65 or older (aged 61 or older depending on the number of years of contributions), the new law provides disincentives for this option by increasing the employer contribution on behalf of those workers.

On the other hand, incentives for older workers to remain in the labor force have increased. For every year an individual continues working beyond the full retirement age, the benefit will increase from 2 per cent to 4 per cent, depending on the number of years of contributions. For workers with less than 25 years of service, the incentive will remain at 2 per cent; from 25 to 36 years, 2.75 per cent; and, 37 or more years, 4 per cent.

Survivor benefits

Survivor benefits for widows aged 65 or older who receive no other pension will increase gradually from 52 per cent of the deceased's base earnings to 60 per cent beginning in January 2012. In addition, the age limit for eligible orphans will be increased from 18 to 21, and up to 25 for a student with income up to the minimum salary. Common law couples will be eligible for survivor benefits as well.

Other provisions

Additional provisions of the law include the following:

- Child care credits will be extended to a mother or a father who leaves the labor force to care for a child (biological, adopted, or foster). Previously, only mothers received credit toward a pension. From 2013 through 2019, the law will also gradually increase the number days of credit per child from 112 to 270.

- Domestic workers will be incorporated into the system beginning January 1, 2012.

- The State Social Security Administration (a supervisory agency created by the new law that incorporates a number of existing social security agencies including the National Institute of Social Security) will be required to inform each worker about his or her future rights to retirement benefits. The details will be determined by regulation, such as what age and how often the statement must be sent out and what specific information the statement must contain.

This article was extracted from the United States Social Security Administration publication International Update, August 2011.

Source: "Recent Developments in Spanish Pensions," Milliman Global Employee Benefits, September 2004; "Spain," International Update, US Social Security Administration, December 2007; Social Security Programs Throughout the World: Europe, 2010, US Social Security Administration; OECD Economic Surveys: Spain, OECD, December 2010; Pensions at a Glance 2011: Retirement-Income Systems in OECD and G20 Countries, OECD, March 2011; "Spain: Adjustment, Reforms and Growth," Government of Spain, March 11, 2011; "Euroindicators," Eurostat news release, April 26, 2011; "Per centage of Population Aged 65 years and Over on 1 January of Selected Years," "Per centage of Population Aged 80 years and Over on 1 January of Selected Years," and "Old Age Dependency Ratio on 1 January of Selected Years," Eurostat, June 2011; Spain--Staff Report for the 2011 Article IV Consultation, International Monetary Fund Report No. 11/215, July 2011; Ley 27/2011, el 1 de agosto de 2011.

Legislation date: 08.2011