The first block of the pension reform has ended up being more ambitious than initially expected. The first advances of the Government indicated that it would address two main points: to end the annual increases of 0.25% of the Rajoy era thanks to a new revaluation mechanism according to the CPI and a series of incentives to promote the delay of the effective age retirement. Finally, the agreement that the social agents and the Government have reached this Monday also knocks down the second key element of the PP pension legislation, the sustainability factor, and also includes two other very relevant “legs”. On the one hand, it reinforces Social Security income with a commitment to support from the Budgets and, in addition, it addresses a list of additional measures with which the Government undertakes to comply with some pending commitments and duties.
Early retirement is a disincentive, but its hardening is alleviated: the keys that bring the pact on pensions closer
Once the agreement is closed at the technical table of social dialogue, it is expected that the businessmen will support the agreement in a consultation with the CEOE and that the Executive can formalize the first social agreement on pensions in a decade in an act throughout the week. The forecast is that the bill will be approved next Tuesday, July 6 in the Council of Ministers and that the measures will come into force by the beginning of 2022. Now it is again the turn for the political debate, with the parliamentary processing of the legislation. The objective committed in Brussels is that this first part of the reform is approved before December 31, 2021.
In the absence of the fine print of the normative text approved by the Executive next week, the agreement reached at the negotiating table with the unions and employers breaks down a wide series of measures. Some very repeated in the media for months, such as the revaluation of pensions according to the CPI, but there are others that are also very specific and more unknown, such as the indefinite recovery of the famous pension safeguard clause of 2011 that Rajoy limited. There are also some novelties, included in the pact at the last minute, such as the end of discrimination by the pension system against women with respect to the so-called female “social service”.
End of the 2013 pension reform
The agreement ends with the two key elements of the pension legislation approved by the Government of Mariano Rajoy unilaterally in 2013 and that at the end of his term the PP itself left unapplied. The reform was simply “dormant”, in force in the legal system and was excepted in recent years each year. The first block of changes finally eliminates both the pension revaluation index, which caused the annual increases of 0.25%, and the sustainability factor, which had the objective of linking the amount of future pensions to life expectancy , which would lead to a reduction in benefits in the coming decades.
The social agents and the Ministry of Social Security have already agreed on the new pension revaluation mechanism, which will rise with the CPI. If this is negative, the pensions will not go down. Pending is the negotiation on the new indicator that replaces the sustainability factor, a “gesture” of the generation of the baby boom with the current youth much less numerous, in the words of Minister José Luis Escrivá.
This element will finally also be included in this bill, although there has not been time to incorporate it (or debate it) yet, so the plans are to introduce it via amendments once the legal text is already being processed in Congress, according to sources of the Social Security. The Government gives a negotiation period of just under five months to agree on what they call the “intergenerational equity index”, until November 15 of this year. Actually, it will operate from 2027, but the Executive wants to approve it now so that the elimination of the sustainability factor – which the unions demanded to sign the agreement – is accompanied by its replacement measure. If there is no agreement in the social dialogue, the Government will include the measure on its own.
Delay retirement with incentives
The Minister of Social Security has explained that the current pension reform being addressed by the Government aims to give sustainability to Social Security for more than two decades, so that the most critical moment for the system that will occur with the retirements of baby boomers. Among the necessary measures, Escrivá has defended that it is not necessary to increase the legal retirement age, which advances to 67 years thanks to the 2011 pension reform, and is in line with neighboring countries. But it has insisted on the need to delay the effective age at which people retire (64.6 years, at present).
For this, the Government has agreed with the unions and employers various incentives to try to keep people working at advanced ages, but without applying mandatory measures. According to the Executive’s forecast, the set of measures will increase the effective retirement age in 2050 by about two years, they explain in Social Security. Among the incentives, the following stand out:
– The first two months in which voluntary early retirement is possible are penalized more. That is to say, the month 24 in advance and month 23, in which the bulk of the people who opt for the anticipated one retire today, but the current penalties are reduced as of month 22. The idea is that cause a slight delay, even for two months, in early retirement. At the individual level it is a delay that is not very noticeable, but in aggregate terms it does have an effect on the Social Security coffers, according to the Ministry. The reducing coefficients are as indicated in the table:
It will also eliminate the lower reduction coefficients that now apply in practice to workers with higher wages and who leave with the maximum pension (4% for two years instead of 16% under the current system). In the end, the social agreement includes an equalization of the reduction coefficients with the group of workers that will be progressive from 2024, over ten years, and that is accompanied by the increase in the maximum pension.
The new coefficients of early retirement will not apply to people who have been laid off before the end of this year, as long as they do not return to work more than 12 months before retiring, and those who leave their companies in ERE or another type afterwards of agreements that were signed before the entry into force of this law. Although if the new penalties are more favorable to them, they can benefit from this legislation.
– More “reward” to continue working beyond the legal retirement age. It will go from the current increase in the pension of 3.2% per year to 4% for each year that the person continues to work. In addition, it is allowed to choose another means of compensation: you can choose a lump sum at the time of retirement, ranging from 4,786 euros in the lowest case to 12,060 euros, depending on the person’s salary and your listing career. There will also be the option of combining both options, which the Government has yet to develop.
– Restriction on forced retirement by agreement and contribution aid for elderly workers. These measures are designed more for companies, to encourage the permanence of elderly workers in the labor market. For example, companies will only pay 25% of social contributions for common contingencies during the leave of employees who have reached 62 years of age.
Additional draft measures
The first block of modifications also comes out with important additions. For example, financial support from Social Security is agreed from the General State Budgets, which will assume several items at least between now and 2023. Transfers account for about 21,000 million euros a year, calculated in CCOO.
One of the novelties included at the last minute consists of equating Franco’s female “social service” with compulsory military service to prove the contribution period necessary for early retirement. The Supreme Court already ruled last year that not considering this period was discriminatory with women.
The pact sets a date, black on white, to some pending commitments by the Executive. It is given six months to equalize access to the widowhood pension for common-law couples and married couples, and it states that in three months all scholarship holders, whether or not they are paid for their internships, must be contributing to Social Security. To this end, the regulations pending in this regard will be approved within this period and support will be given to companies, which will be exempt from 75% of the contribution.
A conflict that was still open is also closed, with respect to the pension safeguard clause of the 2011 reform, which Rajoy limited. Until now, the Sánchez government has been approving extensions each year, in the last days of December. The social agreement finally includes its indefinite recovery, as requested by the unions.