Spain's pension system: Reforms, challenges and proposals

An ageing population is one of the biggest challenges, if not the biggest, facing Spain's public finances in the coming decades. In less than 30 years, the number of Spaniards of retirement age will increase from 9.7 million to 16 million, which will increase the cost of public benefits that will need to be covered. Against this background, researchers from the Foundation for Applied Economic Research (Fedea) warn that the latest pension reforms are "particularly worrying" because, in their view, "they have increased costs to a much greater extent than revenues".

The pension reforms include new revenue-raising measures that can be summarized into three: a phased increase in contributions for all workers, a cap on the maximum contribution base, and a contribution surcharge for higher salaries. The aim is to offset the cost increases that the demographic trend will entail and to protect the purchasing power of retirees.

In addition, the draft provides for a new incentive system to encourage active retirement, i.e. to allow working and receiving a pension at the same time when reaching retirement age. Fedea believes that there is room to move forward on this last point and that the measures adopted by the government "did not result in radical changes compared to previous legislation".

For this reason, Fedea researchers propose a new model of active retirement that combines the three currently existing forms and makes work and the possibility of receiving a pension fully compatible. "Generally, receiving a pension is incompatible with paid work," argues this think tank, which is largely funded by a few large listed companies but has prestigious academics in its ranks.

The idea is to incentivize workers so that when they reach the statutory retirement age they are not completely disconnected from the labor market. This would mitigate rising pension costs and boost incomes. "The only way to successfully address the problem of aging is to use some of the benefits of longevity to produce and create wealth by extending working lives," they argue.

To do this, they propose a gradual, tailored to each occupation and flexible transition to retirement. And in any case, it allows the worker to decide whether he or she wants to continue working after fulfilling the requirements for retirement and how to combine his or her pension with the hours worked.

They also propose that workers who decide to continue working when it is time to retire should pay contributions on the same scale as other Spaniards. Under the current system, when a worker enters active or deferred retirement, they stop paying contributions or do so at a very low rate. Fedea's proposal means that the pension of union members who choose to postpone retirement or combine it with work will be recalculated when the extended employment is completed. This will increase the incentive to receive a higher pension if they extend their working life.

New contract without severance pay

One of the main obstacles standing in the way of the Fedea plan is the reluctance of companies to extend the employment history of their workers once they have met the requirements for full retirement. This can mean that a worker, who in many cases has accumulated a large severance package, may not be able to quit if the company decides to cancel his or her services.

To overcome this hurdle, Fedea proposes to create a new type of contract for anyone who chooses to continue working despite ending their contributory career. A contract that would not incur compensation costs and would allow them to keep their job, whether full-time or fewer hours, with the same or a different company and without salary restrictions. "The pension will be fully compatible with any salary or income," they add.

The lack of severance pay will be justified by the fact that the employee already has the certainty that if they become unemployed, they will receive their pension. The contract will set a minimum notice period for the employee and the company to freely terminate the contract if either party wishes to do so.