Pensions
Business 15/11/2021

Employers distance themselves from Government proposal for pension reform

The Spanish government's idea of increasing taxes only convinces unions

2 min
The pensions of the baby boomer generation worry the Spanish government.

MADRIDThe meeting on the design of the mechanism for intergenerational equality in pensions on Monday ended without consensus. While employer associations CEOE and Cepyme have distanced themselves from the Ministry for Social Security's proposal to increase taxes, the main unions are favourable, as negotiating sources explained to ARA, who add that informal contacts will be maintained to try to convince employers, also warning that the bill may yet be changed.

November 15 was the date that the Spanish government and social partners had set to close an agreement on this mechanism for "intergenerational equality", the tool that will replace the PP's "sustainability factor" established in 2013. It aims to cover the cost of pensions when baby boomers retire, who as the largest generation ever will stretch the system. Monday's proposal from the Ministry of Inclusion and Social Security, headed by José Luis Escrivá, is the same as the one put forward last week. Specifically, the Spanish government plans raise workers' contributions to be able to pay pensions; that is, on the revenue side

0.6 points more in contributions

The ministry has proposed a 0.6 point increase in contributions over ten years. The increase would be temporary, for a decade, and would begin to be applied from 2023. The distribution of the increase in contributions would be assumed by the company and workers. On the one hand, the company would assume an increase in contributions of 0.4 percentage points, while the worker would assume 0.2 points, which would translate into a reduction in salary.

Specifically, a worker earning one thousand euros a month would see his or her contribution increase by more than 5 euros a month. This increase would feed the reserve fund to meet the cost of pensions once baby boomers retire.

Protecting the fund

The goal is to further protect this fund so that it does not become empty again, as happened with previous governments, both PP and PSOE. The ministry has put on the table the approval of a new regulation that guarantees the use of this quota and its yields, to be exclusively spent on pensions. The fund held almost €70bn at one point, which could have been used to pay baby boomers' pensions. Now, however, just over €2bn remain

When would the money be used?

This fund would start to be used from 2030, when the pension system could be under greater strain. This is when the phase that the Ministry of Social Security calls "contingent" begins. The ministry has proposed that every three years starting in 2030 the forecasts for pension spending in 2050 be reviewed. Thus, it could be verified whether the European Commission's Ageing Report for the year 2024 are accurate and ajust any possible deviations. In this case, the fund would act as a buffer, i.e. the money would be used, with an annual limit of 0.2% of GDP.

If the fund were not to be affected, the Spanish government would consider "returning" this increase in contributions through a reduction in contributions or an increase in pensions.

Will this be enough?

The truth is that optimism does not pervade the forecasts for the future of the pension system. If the use of this fund is not enough, the Ministry for Social Security has also proposed two more measures, yet to be specified, to "alleviate spending". These would involve opening a new negotiation with businesses and unions, to propose measures to "compensate" spending and the second would mean a further increase in taxes.

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