Pensions in Spain

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Pensions in Spain consist of a mandatory state pension scheme, and voluntary company and individual pension provision.

Contents

Mandatory state pension scheme

The state pension scheme is part of the Social Security system in Spain. There are two categories of pension in Spain: contributory and non-contributory. The pensions system is financed by a payroll tax on salaries. The employee pays 4.7% of his/her salary while employers must pay the equivalent of 23.6% of an employee's salary into the scheme. [1]

Non-contributory pension

Non-contributory means-tested pensions [2] are targeted at low-income households and the disabled. Beneficiaries must not have been contributory members of the Social Security system during their working life. In 2000, beneficiaries of non-contributory pensions was 471,275 pesetas.

In 2010 in order to qualify the beneficiary may not have a monthly or annual income equal to or greater than the non-contributory pension of €339.70 per month (€4,755 per annum). Incomes of any persons living with the applicant are taken into account when deciding eligibility. [3] In 2012 the pension was raised to 357.70 euros a month. If the pension was claimed directly by the person then 2 additional months' pension are added throughout the year to make it a total of 14 months a year of pension. If the disabled person was claimed by a parent or guardian then there are only 12 months of pension a year. Both are the same amount each month, but the total for the entire year is much more if claimed by the disabled person compared with being claimed by the parent or guardian.

Contributory pension

The contributory retirement pension (Pension por Jubilacion Ordinaria) represents the main source of retirement income for approximately 8.75 million pensioners in Spain. [4] In 2010 the average pension was 906 euros per month. Contributory retirement pensions in Spain are the second highest (as % of final salary) in Europe after Greece and amount to approximately 81% of final salary levels. [5] While the social security system collected 80Bn€ in contributions in 2010 it paid out 82 Bn€ in pensions. In January 2011 the government, employers and trade unions agreed on a series of reforms that will increase the retirement age by 2 years from 65 to 67 years. [6] The new minimum age will come into effect in 2027.

Private pensions

Private pensions in Spain generally consist of individual pensions and collective pensions (divided into associative and company schemes). Approximately 50% of the population are covered by one or both types. [7]

Introduced under the Law on Pension Plans and Funds in June 1987, private schemes had assets totaling 7% of GDP in 2010. The schemes benefit from tax subsidies whereby individuals can contribute up to €8,000 per year free of income tax into either collective or individual schemes. By 2009 approximately 8 million people had Individual Pension Plans and 2 million people were covered by company pension plans. [2] The assets of Individual Funds amounted to about 53 Bn€ while Company Funds had assets of about 3 Bn €.

Social Security Reserve Fund

The Social Security Reserve Fund was created in 2000 with the aim of investing current Social Security surpluses in order to finance future State Pension Scheme shortfalls. It was created as one of the recommendations of the tri-partite Toledo Pact of 1995 between government, employers and trade unions. [8] In 2009 the fund amounted to 60 Bn€ [9] and in 2010 assets had increased to 64 Bn€. [10] By the end of 2018, there was just 5 Bn€ left. [11]

Reforms

The necessity of reforming Spain's pension system arose largely in response to pressure resulting from Spain's changing demographic trends. A growing and ageing population and a declining fertility rate are two sources of significant strain upon Spain's public budgets and finances, as the public pension system had to rely upon a smaller productive population to contribute enough taxes to compensate for a growing demographic of elderly retired workers who would be withdrawing from their pensions, living for longer periods of time, and would likely be in need of costly health services. This demographic trend is predicted to continue in the coming decades, with the World bank predicting that half of Spain's population will fall into an age demographic older than 55 by the year 2050, and if this prediction becomes a reality than Spain would have one of the highest median ages in the world. [12] In addition to a growing elderly demographic of pensioners, Spain also has a high child gap (the difference between the highest number of children and the number that couples want), [13] and trends suggest that the total fertility rate is in a decline. Spain's average birth rate was 2.86 in 1970, 2.21 in 1980, and 1.21 in 1994, and according to Eurostat, Spain's average birth rate was 1.18 in contrast with the European Community's average of 1.43. At this point in 1994, Spain is 44% below the minimum rate needed to achieve generation replacement. [14] In light of these demographic trends challenging the sustainability of Spain pension system, reforms and austerity measures have sought to reduce the generosity of the state's pension benefits and create incentives and changes to keep older workers in the labor force for a longer period. [15]

One of Spain's key reforms to implement this policy is to increase the retirement age from 65 to 67 over a number of years, but this change will occur gradually over a 14-year period that started in 2013 and will end in 2027. The retirement age will increase by a month and a half each year up to the end date, and is being conducted in a staggered manner to make the change less disruptive to the population. [16] However, this new retirement age does have exceptions to make it more flexible—individuals who have the maximum years of contributions will be able to retire at the age of 64, and it will also be possible that in cases of involuntary unemployment that those who have 33 years of contributions will be able to enter into early retirement up to four years before the retirement age. Legal retirement age in the case of voluntary unemployment will require 35 years of contributions. [17] Partial retirement is also a possibility, if a new employee is brought in and once the reform is completed in 2027, partial retirement will be possible at the age of 63 if 36 years have been contributed. In this case both the new and the partially retired employee will contribute fully to the pension system. Prior to the implementation of this reform, partially retired workers only contributed proportionally based on the amount of time they worked. [17] Exceptions to the new retirement age will also include individuals who work in dangerous, hazardous, or unhealthy conditions, and individuals with assessed disabilities of 65% or more, and in cases of reduced life expectancy individuals will be able to retire at a lower age if they have a 45% or more assessed disability. [18]

The reforms will also encourage workers to delay retirement and the withdrawal of pension benefits after retirement age by creating incentives for them to continue working. Workers that have contributed between 15 and 25 years and continue working after the age of 67 will be able to increase their pension benefits by 2% of the base calculation per additional year, and this increase will scale depending on the years of contribution. Up to 4% if worker have 37 years of contributions. [1] Other significant reforms to the pension system will concern the minimum period the number of years that the pension system must be contributed before a public pension can be secured. The minimum originally being 15 years but like the retirement age the minimum will also rise in a staggered manner up to 25 years. [16] Pension reforms will also address the needs of the family by covering maternity and paternity periods with up to three years of leave of absence for childcare, and in the case of maternity, a supplement will apply to contributory pensions for retirement, widowhood, and permanent disability as of 2016. This additional percentage of contributory pension will increase to up to 15% depending on the number of children; [17] this is one incentive to address the issue of Spain's current fertility rate, and how Spanish women tend to have their first child relatively late in life compared with other European countries. [19] An additional reform will also come into effect in 2019,

when calculations based on life expectancy, the number of pensioners, and the financial situation of the pension system will replace the previous inflation-based system. To see that these measures continue to be implemented, a committee will be appointed to report on the sustainability of the pension system in a periodic manner. [20]

See also

Related Research Articles

<span class="mw-page-title-main">Pension</span> Retirement fund

A pension is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments. A pension may be a "defined benefit plan", where a fixed sum is paid regularly to a person, or a "defined contribution plan", under which a fixed sum is invested that then becomes available at retirement age. Pensions should not be confused with severance pay; the former is usually paid in regular amounts for life after retirement, while the latter is typically paid as a fixed amount after involuntary termination of employment before retirement.

Unemployment benefits, also called unemployment insurance, unemployment payment, unemployment compensation, or simply unemployment, are payments made by authorized bodies to unemployed people. In the United States, benefits are funded by a compulsory governmental insurance system, not taxes on individual citizens. Depending on the jurisdiction and the status of the person, those sums may be small, covering only basic needs, or may compensate the lost time proportionally to the previous earned salary.

The pensions crisis or pensions timebomb is the predicted difficulty in paying for corporate or government employment retirement pensions in various countries, due to a difference between pension obligations and the resources set aside to fund them. The basic difficulty of the pension problem is that institutions must be sustained over far longer than the political planning horizon. Shifting demographics are causing a lower ratio of workers per retiree; contributing factors include retirees living longer, and lower birth rates. An international comparison of pension institution by countries is important to solve the pension crisis problem. There is significant debate regarding the magnitude and importance of the problem, as well as the solutions. One aspect and challenge of the "Pension timebomb" is that several countries' governments have a constitutional obligation to provide public services to its citizens, but the funding of these programs, such as healthcare are at a lack of funding, especially after the 2008 recession and the strain caused on the dependency ratio by an ageing population and a shrinking workforce, which increases costs of elderly care.

A private pension is a plan into which individuals contribute from their earnings, which then will pay them a private pension after retirement. It is an alternative to the state pension. Usually, individuals invest funds into saving schemes or mutual funds, run by insurance companies. Often private pensions are also run by the employer and are called occupational pensions. The contributions into private pension schemes are usually tax-deductible. This is similar to the regular pension.

In France employees of some government-owned corporations enjoy a special retirement plan, collectively known as régimes spéciaux de retraite. These professions include employees of the SNCF, the RATP, the electrical and gas companies which used to be government-owned; as well as some employees whose functions are directly related to the State such as the military, French National Police, sailors, Civil law notaries' assistants, employees of the Opéra de Paris, etc. The main differences between the special retirement plan and the usual private sector retirement plans are the retirement age and the number of years a worker must contribute to the fund before being allowed a full pension. In the private sector the minimum retirement age is 62 and the minimum number of quarters of contribution to the retirement fund in order to receive a full pension is between 166 and 172 quarters depending on date of birth. Employees who are enrolled in the special retirement plan can retire earlier.

<span class="mw-page-title-main">Defined benefit pension plan</span> Type of pension plan

Defined benefit (DB) pension plan is a type of pension plan in which an employer/sponsor promises a specified pension payment, lump-sum, or combination thereof on retirement that depends on an employee's earnings history, tenure of service and age, rather than depending directly on individual investment returns. Traditionally, many governmental and public entities, as well as a large number of corporations, provide defined benefit plans, sometimes as a means of compensating workers in lieu of increased pay.

Mexico reformed its pension system in 1997, transforming it from a pay as you go (PAYG), defined benefit (DB) scheme to a fully funded, private and mandatory defined contribution (DC) scheme. The reform was modeled after the pension reforms in Chile in the early 1980s, and was a result of recommendations from the World Bank. On December 10, 2020, the Mexican pension system would again undergo a major reform.

Pensions in Norway fall into three major divisions; State Pensions, Occupational Pensions and Individual or personal Pensions.

A social pension is a stream of payments from state to an individual that starts when someone retires and continues in payment until death. It is a part of a pension system of most developed countries, specifically the so-called zero or first pillar of the pension system, which is a part of state social security system. The social pension is different from other types of pension since its eligibility criteria do not require former contributions of an individual, but citizenship or residency and age or other criteria set by government.

Pensions in France fall into five major divisions;

Pensions in Germany are based on a “three pillar system”.

India operates a complex pension system. There are however three major pillars to the Indian pension system: the solidarity social assistance called the National Social Assistance Programme (NSAP) for the elderly poor, the civil servants pension and the mandatory defined contribution pension programs run by the Employees' Provident Fund Organisation of India for private sector employees and employees of state owned companies, and several voluntary plans.

Unemployment benefits in Spain are contributory and non-contributory. They are part of social security system in Spain and are managed by the State Public Employment Service (SEPE). Employers and employees contribute to the unemployment contingency fund and if an unemployed person fulfills certain criteria they can claim an allowance which is based on the time they have contributed and their average wage. A non-contributory benefit is also available to those who no longer receive a contributory benefit dependent on a maximum level of income.

Pensions in Ukraine provide income for retirees in Ukraine. They are provided pursuant to the Law of Ukraine on Compulsory State Pension Insurance that specifies a three-tiered pension provision system.

<span class="mw-page-title-main">Pensions in Armenia</span>

There are various types of Pensions in Armenia, including social pensions, mandatory funded pensions, or voluntary funded pensions. Currently, Amundi-ACBA and Ampega act as the mandatory pension fund managers within Armenia.

Compared to other liberal democracies, Ireland's pension policies have average coverage, which includes 78 percent of the workforce, and it offers different types of pensions for employees to choose from. The Irish pension system is designed as a pay-as-you-go program and is based on both public and private pension programs.

<span class="mw-page-title-main">Pension policy in South Korea</span>

South Korea's pension scheme was introduced relatively recently, compared to other democratic nations. Half of the country's population aged 65 and over lives in relative poverty, or nearly four times the 13% average for member countries of the Organisation for Economic Co-operation and Development (OECD). This makes old age poverty an urgent social problem. Public social spending by general government is half the OECD average, and is the lowest as a percentage of GDP among OECD member countries.

Pensions in Denmark consist of both private and public programs, all managed by the Agency for the Modernisation of Public Administration under the Ministry of Finance. Denmark created a multipillar system, consisting of an unfunded social pension scheme, occupational pensions, and voluntary personal pension plans. Denmark's system is a close resemblance to that encouraged by the World Bank in 1994, emphasizing the international importance of establishing multifaceted pension systems based on public old-age benefit plans to cover the basic needs of the elderly. The Danish system employed a flat-rate benefit funded by the government budget and available to all Danish residents. The employment-based contribution plans are negotiated between employers and employees at the individual firm or profession level, and cover individuals by labor market systems. These plans have emerged as a result of the centralized wage agreements and company policies guaranteeing minimum rates of interest. The last pillar of the Danish pension system is income derived from tax-subsidized personal pension plans, established with life insurance companies and banks. Personal pensions are inspired by tax considerations, desirable to people not covered by the occupational scheme.

<span class="mw-page-title-main">Public pensions in Greece</span>

Public pensions in Greece are designed to provide incomes to Greek pensioners upon reaching retirement. For decades pensions in Greece were known to be among the most generous in the European Union, allowing many pensioners to retire earlier than pensioners in other European countries. This placed a heavy burden on Greece's public finances which made the Greek state increasingly vulnerable to external economic shocks, culminating in a recession due to the 2008 financial crisis and subsequent European debt crisis. This series of crises has forced the Greek government to implement economic reforms aimed at restructuring the pension system and eliminating inefficiencies within it. Measures in the Greek austerity packages imposed upon Greek citizens by the European Central Bank have achieved some success at reforming the pension system despite having stark ramifications for standards of living in Greece, which have seen a sharp decline since the beginning of the crisis.

The Caixa Andorrana de Seguretat Social (CASS) is the public institution in charge of the Social Security system in Andorra. It was established in April 1968. Since the Constitution of Andorra was approved in 1993, the objective of the Andorran system is to implement Article 30: «The right to health protection and to receive benefits to meet other personal needs is recognized. To these ends, the State will guarantee a Social Security system ». That is to say, guarantee protection, in its contributory and non-contributory modality, of insured persons, direct or indirect, through the appropriate benefits. It is compulsory for salaried workers and also for those who develop an economic activity.

References

  1. 1 2 "Seguridad Social: Internet".
  2. 1 2 "Chart" (PDF). www.espanet2010.net. Retrieved 2020-08-17.
  3. ↑ "Pensió no contributiva per jubilació". gencat.cat.
  4. ↑ "La nómina de pensiones contributivas de enero". Archived from the original on 2011-01-27. Retrieved 2011-02-20.
  5. ↑ "Data" (PDF). www.oecd.org. Retrieved 2020-08-17.
  6. ↑ "El Diario Económico de EL ESPAÑOL". El Español (in Spanish). 2020-02-26. Retrieved 2020-08-17.
  7. ↑ http://www.oecd.org/dataoecd/45/46/44686629.pdf Page 13 Pensions
  8. ↑ http://www.tt.mtin.es/periodico/documentos/Recomen%20Pacto%20Toledo.htm Archived 2011-10-01 at the Wayback Machine (Spanish)
  9. ↑ "Seguridad Social: Internet" (PDF).
  10. ↑ "Seguridad social 2010". Archived from the original on 2011-06-23. Retrieved 2011-02-20.
  11. ↑ "Seguridad Social: Fondo de Reserva".
  12. ↑ de Pedraza, Pablo; Muñoz de Bustillo, Rafael; Rivas, Luis Alberto (2009). "Ageing Population and Spanish Pension System Reforms: Effects on Average Pensions and Inequality Among Pensioners". Economic Analysis Working Papers (2002-2010). Atlantic Review of Economics (2011-2016). 8: 1–28.
  13. ↑ [ dead link ]
  14. ↑ Bosch, Xavier (1998). "Barcelona Investigating the reasons for Spain's falling birth rate". The Lancet. 352 (9131): 887. doi:10.1016/s0140-6736(05)60019-0. PMID   9742992. S2CID   43811675.
  15. ↑ Jiménez-Martín, Sergi; Martín, Alfonso R. Sánchez (2007). "An Evaluation of the Life Cycle Effects of Minimum Pensions on Retirement Behavior". Journal of Applied Econometrics. 22 (5): 923–950. doi:10.1002/jae.956. hdl: 10230/732 . JSTOR   25146555.
  16. 1 2 Administrator. "Spanish pension benefits 2012". www.advoco.es. Retrieved 2017-12-09.
  17. 1 2 3 "Pensions at a glance 2017:Country Profiles-Spain" (PDF). www.oecd.org.
  18. ↑ "Social Security Programs Throughout the World: Europe, 2016 - Spain". www.ssa.gov. Retrieved 2017-12-09.
  19. ↑ "Demography Report" (PDF). www.demografie.sachsen.de.
  20. ↑ "Pension system in Spain – Pension Funds Online". www.pensionfundsonline.co.uk. Retrieved 2017-12-09.
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