Agreement between the Government and the unions on the ‘intergenerational equity mechanism’ of pensions, which will entail an additional contribution of 0.6 percentage points over the next decade to guarantee the retirement of the large generation of the baby boom. Only bilateral social pact, without the employers’ associations, who took down this Monday from the proposal of Minister José Luis Escrivá to replace the ‘sustainability factor’ of the PP. Employers were reluctant to contribute more to contribute to the pension system, something that CCOO and UGT have supported, considering that it allows abandoning the logic of cuts of the past and replacing it with a reinforcement of Social Security income.
Five keys to the debate on the mechanism to support the pensions of the ‘baby boom’ generation
The intergenerational equity mechanism (MEI) agreed with the unions consists of the following: Companies and workers will contribute 0.6 percentage points more to Social Security over the next ten years, from 2023 to 2032, to finance pensions. The distribution of how this additional burden will be assumed is finally more advantageous for the worker than initially proposed: 0.5 additional points will be assumed by the company and 0.1 points will be borne by the employee, according to sources of the negotiation, compared to the ratio of 0.4 and 0.2 that Escrivá had proposed to employers and unions last Monday.
The funds raised through this additional contribution will be accumulated in the so-called ‘pension money box’, the Reserve Fund, and are intended to function as an income “cushion” to face the challenge of the retirement of the baby boomers.
The Minister of Social Security, José Luis Escrivá, will appear at a press conference at 7.15 pm to report on the details of this agreement.
Under the “generation of baby boom“Spain encompasses people born between the mid-50s and 70s, years in which the country’s population increased a lot. These population cohorts are between 44 and 64 years of age, approximately.
The subsequent generations, on the other hand, were less extensive. And here is the challenge: the system will have to support for a few decades a large number of pensioners with a more limited mass of workers. To put a reference: according to estimates by the Tax Authority (AIReF), the dependency ratio of the elderly –population over 66 years of age over the working-age population– will double, going from the current 26% to 53% in 2050, the year of increased tension.
A mechanism in two phases
The price increase would only be the first phase of the MEI. The minister in charge of pension reform, José Luis Escrivá, has agreed with the unions to monitor Social Security accounts and the forecast of pension spending in these most stressed years, with the possibility that future phases may unfold. of the equity mechanism. At this point, the unions have also managed to modify the minister’s initial proposal.
“In the event that there is no deviation from the planned spending path” on pensions, “no measure will be applied and the use of the reserve fund resources will be considered to reduce social contributions or improve the amount of contributions. pensions “, includes the joint statement released this afternoon.
But, if from 2033 “a deviation of 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 the money accumulated in the ‘pension piggy bank’ thanks to this additional contribution, “with an annual disposition limit of 0.2% of Gross Domestic Product (GDP)”, the pact includes.
If these funds were not enough to cover the deviation of spending, “the Government will negotiate with the social partners for its 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 spending on pensions in terms of GDP, either to increase the rate of contribution or other alternative formulas to increase income, “says the text.
What does the agreement change regarding Escrivá’s departure offer? The second phase of the mechanism is pending future negotiation, but it is no longer opting to apply spending reduction measures as a priority (which could lead to cuts in pensions, among other possibilities). The pact contemplates these measures, but also “increase the rate of contribution or other alternative formulas to increase income”, a ratio of CCOO and UGT.
Contributing more instead of cuts in pensions
Faced with the challenge of baby boom, Minister José Luis Escrivá defends that the public pension system is sustainable with some adjustments, without having to apply the cuts produced by the 2013 reform, and that the government of Mariano Rajoy itself left without application at the end of his term.
One of the key tools of the PP legislation was the ‘sustainability factor’, which linked the amount of benefits of future pensioners to life expectancy, in such a way that they were progressively reduced. Those who assumed greater cuts in future pension were, therefore, the youngest people, since it is assumed that they will live longer.
The coalition government pledged to repeal this factor and replace it with the ‘intergenerational equity mechanism’ (MEI). Initially, Minister José Luis Escrivá stated that the new element could produce a “small adjustment” in the pension of the baby boomers or delay his access to retirement, which generated a great controversy and forced the minister to qualify his words. In the end, the MEI proposal that Social Security brought to the negotiating table was very different.
The measure is aimed at raising more funds for Social Security, in charge of workers and companies, against the focus of cuts on pensions of the previous legislation.