Taking a look at Spain's pension system: How to secure your future?

Is Spain's public pension system sustainable? Will I have benefits when I retire? What kind of pension will I receive? How can I calculate it? These are questions that concern the millions of workers, salaried and self-employed living in Spain. There are 9,922,051 pensioners in Spain. Old-age pensions, widows' and widowers' pensions, orphans' pensions - a whole range of income opportunities. Their number has not stopped growing, and at the beginning of 2005 the number of pensioners barely exceeded 7.3 million. Recent changes in the pension system combined with fluctuations in the CPI raise many questions. In our article we explain how the Spanish pension system works.

How are pensions maintained?

The body responsible for managing the public pension system in Spain is Social Security. It operates on a 'pay-as-you-go' principle: everyone who works contributes to a 'single fund'. This fund is used to pay retirement pensions and other public social benefits (e.g. widows' and orphans' pensions and unemployment benefits). The system is based on the principle of financial solidarity: active workers pay pensions to those who have already retired, while they themselves will benefit from the labour of future generations.

The amount of benefits depends on the financial contributions made to the social security system during a working life, in accordance with the principle of proportionality of contributions. Thus, those who have contributed more and paid higher contributions will also receive a higher pension.

Am I entitled to a pension?

After retirement, the employee begins to receive a monthly payment for life. The first condition for receiving a contributory pension is that you must be linked to and contribute to the social security system. The second is reaching a specified age. In 2024, workers who have contributed for 37.5 years will be able to retire at age 65. Those who have not reached this age will have to wait until they are 66 years and two months old. This age will be gradually pushed back until 2027, when 38 years and six months of contributions will be required to retire at 65, and those who do not reach this age will be able to retire at 67.

This gradual postponement of the retirement age is a direct consequence of the pension reforms approved in 2011 and 2013. In addition, mandatory retirement no longer exists and the law provides for exceptions whereby retirement can be earlier (as in the case of early or partial retirement) or after age 65 (as in the case of flexible retirement). Finally, a minimum contribution period must be reached, which is currently 15 years. Those who reach this threshold are entitled to 50% of the maximum benefit. This percentage then increases until they reach 100% of the amount to which they are entitled.

How much pension will I receive?

The final amount that pensioners receive each month is calculated as a percentage of contributions and depends on the age of retirement and the number of years worked. The first step in calculating the old-age pension is to determine the pension base. This is obtained by adding up the contribution bases for the last 25 years (300 monthly contribution bases in total) and dividing by 350. This is explained in detail by Social Security itself on its website.

If a future retiree has periods without contributions in the last 25 years, he or she can take advantage of the help provided by Social Security: gap integration, which allows them to fill in with fictitious contribution bases. This allows you to add the minimum base in effect at any given time for 48 months and half of that minimum base starting in the 49th month. But there is a catch: this method cannot be used by the self-employed.

Problems of the pension system

Spain currently has the third highest life expectancy in the world and a high percentage of an ageing population. This upsets the balance of the pay-as-you-go system, which depends on the number of active workers being sufficient to support the growing number of pensioners. The lower the share of the employed population, the lower the GDP and thus the higher the proportional cost of pensions. The balance of the pay-as-you-go system was disturbed in 2008, when rising unemployment pushed the number of employed people to historic lows. Thus, more was spent on pensions than was received.

The pension replacement rate is the ratio between the size of the first pension and the last salary. The higher this ratio, the higher the pension expenditure. Currently, the average ratio in Spain is over 81%, the highest in the European Union. All indications are that this ratio will continue to decline, which will reduce the purchasing power of pensioners.

Another problem facing the system is related to the way the deficit has been managed over the last decade. A large part of the budget was drawn from the Reserve Fund, a government fund designed to address the financial difficulties of the Social Security system. Subsequently, loans were taken out, which affected the growth of the public debt.

Conclusion

Spain's pension system offers comprehensive mechanisms to provide income in old age, but it faces a number of significant challenges. It is important to realise that the future of pension provision depends on current decisions and financial stability. It is critical for workers and the self-employed to be informed about their rights and options in order to plan their retirement future as effectively as possible.