Spain | Pension reform pending

Summary

Government, unions and employer organizations have announced a preliminary agreement on pensions which ensures their sufficiency, but, for now at least, provides no improvement in fiscal sustainability and delays the most difficult decisions.

Key points

• Key points:
• Apart from the incentives related to the increase in the retirement age, what we know of the deal largely suggests a return to the situation after the 2011 reform and a lost decade for guaranteeing pension sustainability.
• Among the measures agreed, the disincentivization of early retirement is a welcome step and postponing it is also encouraged. Every year of deferral increases the pension by 4%, although this is below what the actuarial balance would allow (7.2%).
• The agreement also replaces the 2013 reform and shifts the pension system's deficit onto the state. Firstly, pension increases will be in line with inflation, but without the need for offsetting measures involving revenue and expenditure which ensures the system's financial balance, as the index-linked pension scheme requires.
• Secondly, the Sustainability Factor—which proportionally reduces initial pensions in line with life expectancy (except for late retirement)—will be replaced in the future by an Intergenerational Equity Factor. No details are yet known about this, except that it will come into force from 2027 and is expected to be less generous — if it is to achieve its aim.
• Thirdly, there is explicit recognition that the pension system is not self-sufficient and that the state will take charge of its deficit. In an action that goes against the principle of separation of sources of revenue, certain contributory benefits are being taken over by the state and some unemployment contributions will go to pay pensions.

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