Saturday, March 2

The BOE publishes the first leg of the pension reform, which will be effective from January 1

The Official State Gazette (BOE) publishes this Wednesday the first part of the pension reform agreed between the Government and the social agents after its recent approval by the Cortes Generales.

Minimum pensions, non-contributory pensions and the minimum vital income will increase by 3% in 2022

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The rule, which will come into force on January 1, recovers the CPI as a reference to revalue pensions and marks the end of the sustainability factor, which has never come into force.

With this Law, the revised text of the General Social Security Law is modified and the main recommendations of the Toledo Pact are collected in autumn 2020, which are also integrated into component 30 of the Recovery Plan.

Most of its content, with the exception of the Intergenerational Equity Mechanism, which will replace the sustainability factor, was agreed with the most representative union and business organizations in the tripartite social agreement signed on July 1, 2021.

The law establishes that on January 1 of each year the pensions will be increased in accordance with the average annual inflation registered in the previous year. In 2022, the increase will be 2.5% for contributory pensions and 3% for minimum and non-contributory pensions. In the event that there is a negative CPI year, the rule provides that the amount of the pensions will remain unchanged.

In addition, the law incorporates various measures aimed at voluntarily bringing the effective age closer to the ordinary retirement age. In this sense, four courses of action are established: the review of early retirement, both voluntary and involuntary and due to activity, delayed retirement, active retirement and forced retirement.

Specifically, with regard to voluntary early retirement, the coefficients are now monthly to give future pensioners more flexibility and encourage the voluntary displacement of the age of access to retirement, with a more favorable treatment for longer contribution careers . In addition, the reducing coefficients related to the advancement of the retirement age will be applied on the amount of the pension and not on the regulatory basis of the same, as up to now.

Regarding involuntary early retirement, two aspects are improved. On the one hand, monthly coefficients are established, instead of quarterly; and, on the other hand, in relation to the two years immediately prior to the ordinary retirement age, the same coefficients are applied in determining the involuntary early retirement pension as in the voluntary modality in those cases in which the new coefficient is more favorable than the one currently in force, among others.

Incentives for delayed retirement

In the case of delayed retirement, the text establishes the exemption from contributing for common contingencies, except for temporary disability, as of the corresponding ordinary retirement age. In addition, the incentives are significantly strengthened, which become three types for each year of delay.

In the parliamentary processing of the law, the Intergenerational Equity Mechanism (MEI) was introduced, which the Government finalized in the autumn with the unions, after the CEOE rejected the text for implying a rise in contributions to companies.

The MEI has two components. The first consists of reactivating the Social Security Reserve Fund through a finalist contribution between 2023 and 2032. The contribution will be 0.6 percentage points of the contribution for common contingencies, distributed between the company (0.5 points) and the worker (0.1 points) and will act as a “safety valve” of the system from 2033.

In the event that there is no deviation from the planned spending path, no measure will be applied and the use of reserve fund resources will be considered to reduce social contributions or improve the amount of pensions.

In the event that as of 2033 a deviation in the forecast of pension spending to 2050 is seen in the Aging Reports of the European Commission with respect to the 2024 report (which will be used as a reference), it will be used this Fund, with an annual disposal limit of 0.2% of Gross Domestic Product (GDP).

If the disposition of assets from the Reserve Fund is not enough, the Government will negotiate with the social partners for their elevation to the Toledo Pact, in accordance with their recommendations, a proposal that, in a balanced way, is well aimed at reducing the percentage of pension spending in terms of GDP, either to increase the contribution rate or other alternative formulas to increase income.

Reinforce income

Regarding the strengthening of the income structure of the system, the text establishes that the Law of General State Budgets will contemplate annually a transfer from the State to the Social Security budget for the financing of various concepts that allow to complete the separation of sources in compliance with recommendation 1 of the Toledo Pact of 2020. This transfer was already included in the General State Budgets of 2021 and is expanded in those of 2022.

In addition, in compliance with recommendation 8 of the Toledo Pact, the Law refers to the creation of the State Social Security Agency, with the commitment to present a bill within a period of six months, among other points. Finally, the so-called ‘safeguard clause’ remains in its current regulation indefinitely.