Thursday. 28.09.2023

Spain will raise workers' tax contributions to protect pensions

Business organizations reject the agreement between the government and the unions to raise monthly contributions to social security by 0.6 percentage points and collect 50,000 million until 2032 to pay the pensions of the 'baby boomers'
Minister of inclusion, social security and migrations, José Luis Escrivá. Photo: La Moncloa/File photo.
The Minister of Inclusion, Social Security and Migrations, José Luis Escrivá, speaks at a press conference. Photo: Moncloa/File photo.

The Spanish Government and the major unions, Comisiones Obreras (CC OO) and Union General de Trabajadores (UGT) reached a last-minute agreement on Monday to raise the monthly social security contributions paid by companies and workers.

According to the Government, this is a temporary formula to balance Social Security accounts in the face of the imminent problem that the incorporation into the pension system of the so-called Spanish 'baby boom' generation (those born between the 50s and 70s) will entail.

The approved reform has been called the 'Intergenerational Equity Mechanism' (Mecanismo de Equidad Intergeneracional, MEI). It was agreed last July and replaces the so-called 'Sustainability Factor' (Factor de Sostenibilidad') included in the 2013 reform by the previous conservative government headed by Mariano Rajoy (PP).

The Minister of Social Security, Jose Luis Escriva, said that the new system consists of just a "small" rise in contributions between 2023 and 2032.

The new mechanism consists mainly of the aforementioned increase in worker tax contributions between 2023 and 2032. It will be 0.6 additional percentage points of the contribution for common contingencies, distributed between the company and the worker.

Of these, companies will assume 0.5 percentage points and workers will contribute 0.1 extra points.

Regarding the real extra cost for both, the Social Security calculates that on average it will be an additional increase of 12 euros per month, of which the company will pay 10 and the worker will pay 2.

Employers reject the mechanism

The employers' associations unanimously rejected the agreement. They said the new mechanism will be "insufficient" to guarantee the balance of the system, so additional measures will be necessary in the future.

The government says the mechanism will act as a "safety valve" for the system from 2033, in the event that there is a deviation from the forecast of pension spending for 2050. Meanwhile, it will serve to raise the amounts for the Pension Reserve Fund. The Ministry estimates that in 2032 this fund will have about 50,000 million euros, well above the current 2,000 million.

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.

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

In the event that the provision of assets from the Reserve Fund is not sufficient, the Government will negotiate with the social partners a proposal that, in a balanced way, is aimed either at reducing the percentage of pension spending in terms of GDP, or at increasing the type of contribution or other alternative formulas to increase income.

Spain will raise workers' tax contributions to protect pensions