Extending the calculation of retirement to 35 years excluding the six worst years would increase the lowest pensions and reduce the rest

In the midst of a debate about the pension calculation period, the Bank of Spain has published a report in which it analyzes this measure and its effects on future pensions. If the calculation period were increased without exceptions, the future pension would be reduced. But, if you choose to extend the period allowing some more unfavorable years to be ruled out, things change. In one of the options analysed, which increases the period to 35 years and allows the worst six to be excluded, the effect would be neutral on average. And with important differences according to the cases: for people with lower pensions it would mean an improvement, although for the majority, and especially for those with higher pensions, it would cause a decrease with respect to current legislation.

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Currently, the future pension is calculated taking into account the last 25 years prior to retirement. That is the starting situation analysis of researchers Alejandro Muñoz-Julve and Roberto Ramos, of the Bank of Spain, which study what would happen in different scenarios of extension of the calculation period. The debate is now open for the last phase of the pension reform of the government.

An increase from 25 to 35 years, without any exception, would mean a reduction of 8.2% of pensions, the economists indicate. This reduction would be greater the higher the workers' initial pensions were, with a reduction of 10% for the quartile with the right to higher benefits and a reduction of 2% for those in the quartile with the lowest pensions.

Minister José Luis Escrivá ruled out this Monday the increase in the computation period up to 35 years. "In no case", he stated in an interview. However, the extension of the period is on the table (without specifying how much) and "at the same time" allowing the worst years to be ruled out and/or improving the treatment of gaps without contributing throughout the working career.

What happens if the worst years can be excluded

Researchers from the Bank of Spain deploy several hypotheses of extending the calculation period up to 35 years and in which, simultaneously, the discarding of several years is allowed. In these cases, the future pension is not always reduced.

With the graph below, the economists show that if many years could be excluded, the average initial pension would increase. Especially in the case of an increase in the period to 35 years, allowing pensioners to choose the 25 best in their career.

As the graph illustrates, if the best 25 to 29 years were allowed to be chosen (within a total of the last 35), the situation would be neutral or improved for future pensioners. On the other hand, if the possibility of exclusion were limited to five or fewer years of the total period, the average pension would be reduced.

Neutral effect, with differences depending on the case

The authors of the study stop at a "neutral" scenario detected, whereby the pension would be very similar to what exists today, taking into account the last 25 years. Minister Escrivá has mentioned that his idea is to undertake a reform with a neutral effect, that is, one that does not increase spending, but does not seek to reduce it either.

The report published this Wednesday by the Bank of Spain states that, if it were allowed to choose the 29 best years within the last 35, excluding the six most unfavorable, "the average change with respect to a formula that took into account the previous 25 years to retirement would be slightly positive”. Specifically, the change in the average initial pension would increase by 0.8%.

“It should be noted, however, that the effects would be heterogeneous. For example, more than half of pensioners would see their pension reduced (in relation to taking into account the 25 years of contributions prior to retirement)”, the report states.

“On the other hand, in the case of workers who had experienced more than one year of gaps in contributions or unemployment during their working life, as well as in the case of pensions in the first and second quartiles, the average positive change would be more high," say the researchers.

The initial pensions of the quartile of workers entitled to the lowest benefits would increase by 2.3% compared to the current calculation system. In contrast, pensioners in the quartile entitled to higher benefits would be affected, with a reduction of 1.7% of their pension.

“The possibility of discarding the most unfavorable years in the calculation of the pension would benefit, relatively, the workers affected by contribution gaps or periods of unemployment, as well as those with pensions below the median, so that the inequality in The amount of the new benefits would be slightly less than that resulting from a scheme that used the 25 years prior to retirement”, conclude the researchers.