Spain Pension Reform Update

This update on Spain’s pension reforms is based on the Royal Decree-Law 2/2023, which contains urgent measures to expand pensioners’ rights, reduce the gender gap, and establish a new framework to make the public pension system more sustainable.  Employers should be aware of the following:

• The ‘Intergenerational Equity Mechanism’ increases the salary contribution from 0.6% to 1.2%.
• An increase to the maximum annual base by 1.2% higher than the increase in pensions.
• Payment of an additional fee on amounts exceeding the maximum base (from 2025).
• Regulation of the Social Security Reserve Fund will be nourished by this additional contribution.
• Recalculation of the pension base (27-29 years, from 2026).

The RD-Law contemplates various actions, such as the following:

• Gradual increase in the maximum contribution base.
• A solidarity contribution levied on the wage bill that exceeds the maximum contribution base.
• The Intergenerational Equity Mechanism (MEI) is quantitatively expanded to nourish a Reserve Fund.
• The rule relating to the calculation period for pensions is revised, offering a double alternative over two decades.

Updating the maximum limit for contribution bases

This annual update for the different schemes will be a percentage equal to that established for reevaluating foreseen contributory pensions. It came into force on January 1, 2024, and the percentage increase until 2050 will not be the same (1.2% per year will be added to the maximum base cap).

Additional Solidarity Contribution

From 2025, an additional security quota will be introduced for all people who contribute to the Social Security system, which varies according to the excess of income from employment over the maximum contribution base established in the General State Budget Law of the corresponding year. There are three income brackets corresponding to a progressive contribution rate:

1. The rate of 5.5% to remuneration between the maximum and minimum contribution bases by 10%
2. The rate of 6% to remuneration between 10% to 50% above the maximum contribution base
3. The rate of 7 percent on remuneration exceeding the previous percentage range

The distribution of the solidarity contribution rate between employer and employee maintains the same proportion as the distribution of the contribution rate for common contingencies.

These percentages will be reached in 2045 because the additional solidarity contribution will increase from 2025 until reaching the final rate in 2045. It will start in 2025, with percentages of 0.92%, 1%, and 1.17% for each tranche.

The contribution must take into account the total remuneration received.

Pension reevaluation

Under the contributory model, all pensions within the system, not just the minimum pension, along with the gender gap supplement, will undergo a yearly reevaluation. This reevaluation will be based on the percentage equivalent to the average year-on-year change in the Consumer Price Index over the twelve months leading up to December of the previous year. This change came into effect on January 1, 2024.

Contributory pension supplement for having had children

The gender gap supplement is also granted to men as long as they meet certain conditions.

• It also specifies how the pensions of the respective parents must be calculated to determine which of them is the highest to accredit the requirements for obtaining the supplement. It entered into force on March 18, 2023.
• It determines that this supplement will increase by 10% in the 2024-2025 biennium (in addition to the annual revaluation) which will be distributed between both years as determined by the respective general state budget laws.

Intergenerational Equity Mechanism

The mechanism consists of a final contribution applicable to all schemes. In all cases, contributions are made for the retirement contingency, which will not be computed for benefits and will be fed by the Social Security Reserve Fund.

The price will end up being 1.2 percentage points. One percentage point will correspond to the company and 0.2 percentage points to the worker. If the contribution distribution structure between the company and the employee is modified due to common contingencies, this final contribution will be adjusted to the new structure.

This additional contribution may not be subject to any rebate, reduction, exemption, or deduction.

An increasing scale of percentages is set. It started in 2023, with 0.6%, of which 0.5% corresponds to the company and 0.1% to the worker. It increases by 0.10% each year. In 2029, it will reach 1.2% and be maintained until 2050.

Basis of the retirement pension

The period to be taken into account for the calculation of the regulatory base of the retirement pension is extended to 27 years, although taking as a reference the 29 years prior to the month prior to the causal event, from which the 324 contribution bases with the highest amount of the entire period are selected ex officio.  for which the monthly payments in which there has been no obligation to contribute are first integrated, and, subsequently, the contribution bases for the period are updated in accordance with the evolution of the CPI, except for those corresponding to the 24 months prior to the month prior to the causal event, which are computed at their nominal value.

The gradual application of the new contribution period to be included in the regulatory base is determined in a period ranging from 2026 to 2037.

 

This information is provided by SARE. If you need support with your employee benefits in Spain, please contact Asinta, and we will put you in touch with our local experts in the country.