Agreement between the Government and the unions on the ‘intergenerational equity mechanism’ of pensions, which will entail an additional contribution of 0.6 percentage points over the next decade to guarantee the retirement of the large generation of the baby boom. Only bilateral social pact, without the employers’ associations, who took down this Monday from the proposal of Minister José Luis Escrivá to replace the ‘sustainability factor’ of the PP. Employers were reluctant to contribute more to contribute to the pension system, something that CCOO and UGT have supported, considering that it allows abandoning the logic of cuts of the past and replacing it with a reinforcement of Social Security income.
Five keys to the debate on the mechanism to support the pensions of the ‘baby boom’ generation
The intergenerational equity mechanism (MEI) agreed with the unions consists of the following: Companies and workers will contribute 0.6 percentage points more to Social Security over the next ten years, from 2023 to 2032, to finance pensions. The distribution of how this additional burden will be assumed is ultimately more advantageous for the worker of what was initially raised: 0.5 additional points will be paid by the company and 0.1 points will be paid by the employee, according to sources of the negotiation, compared to the ratio of 0.4 and 0.2 that Escrivá had proposed to employers and unions in the past Monday.
The funds raised through this additional contribution will be accumulated in the so-called ‘pension money box’, the Reserve Fund, and are intended to function as a “cushion” of income to face the challenge of the retirement of the baby boomers. The Minister of Social Security, José Luis Escrivá, will appear at a press conference at 7.15 pm to report on the details of this agreement.
Under the “generation of baby boom“Spain includes people born between the mid-50s and 70s, years in which the country’s population increased greatly. These population cohorts are between 44 and 64 years of age, approximately.
The subsequent generations, on the other hand, were less extensive. And here is the challenge: the system will have to support for a few decades a large number of pensioners with a more limited mass of workers. To put a reference: according to estimates by the Tax Authority (AIReF), the dependency ratio of the elderly –population over 66 years of age on the working-age population– will double, going from the current 26% to 53% in 2050, the year of increased tension.
A mechanism in two phases
The price increase would only be the first phase of the MEI. The minister in charge of pension reform, José Luis Escrivá, has agreed with the unions to monitor Social Security accounts and the forecast of pension spending in these most stressed years, with the possibility that a second may be deployed. phase of the equity mechanism in the future. At this point, the unions have also managed to modify the initial proposal of the Executive.
“In the event that there is no deviation from the planned spending path” on pensions, “no measure will be applied and the use of the reserve fund resources will be considered to reduce social contributions or improve the amount of contributions. pensions “, includes the joint statement released this afternoon.
But, if from 2033 “a deviation of the forecast of pension spending to 2050 is seen in the Aging Reports of the European Commission with respect to the 2024 report (which will be used as a reference)”, it will be used the money accumulated in the ‘pension money box’ thanks to this additional contribution, “with an annual disposition limit of 0.2% of Gross Domestic Product (GDP)”, the pact includes.
If these funds were not sufficient to cover the deviation from the planned expenditure, “the Government will negotiate with the social partners for its elevation to the Toledo Pact, in accordance with their recommendations, a proposal that, in a balanced way, is well aimed at reducing the percentage of spending on pensions in terms of GDP, either to increase the rate of contribution or other alternative formulas to increase income, “says the text.
What changes the final agreement regarding Escrivá’s departure offer? The second phase of the mechanism is pending future negotiation, but It no longer opts for applying spending reduction measures as a priority (which could mean cuts in pensions, among other possibilities). The pact contemplates these measures, but also “increase the rate of contribution or other alternative formulas to increase income”, a ratio of CCOO and UGT.
Contributing more instead of cuts in pensions
Faced with the challenge of baby boom, Minister José Luis Escrivá defends that the public pension system is sustainable with some adjustments, without having to apply the cuts produced by the 2013 reform, and that the Government of Mariano Rajoy itself left without application at the end of his mandate.
One of the key tools of the PP legislation was the ‘sustainability factor’, which linked the amount of benefits of future pensioners to life expectancy, in such a way that they were progressively reduced. Those who assumed greater cuts in future pension were, therefore, younger people, since they are supposed to live longer.
The coalition government pledged to repeal this factor and replace it with the ‘intergenerational equity mechanism’ (MEI). Initially, Minister José Luis Escrivá stated that the new element could produce a “small adjustment” in the pension of the baby boomers or delay their access to the withdrawal, which generated great controversy and forced the minister to qualify his words.
In the end, the MEI proposal that Social Security has brought to the negotiating table has been very different. The mechanism is aimed at raising more funds for Social Security, in charge of workers and active companies in the next decade, in the face of the approach of increasing cuts on all pensions from 2023, which was supposed by the previous legislation.
This change in approach is what has led the unions to agree with the Government and what the leaders of CCOO and UGT have highlighted the most in recent days. Unai Sordo, secretary general of the CCOO, has highlighted in his Twitter account several reasons why he considers that the MEI agreed is “equitable”.
Pepe Álvarez, general secretary of UGT, has celebrated for his part to send “to the trunk of memories” the factor of sustainability of the PP. “We ensure that pensions are not lowered, that the retirement age does not increase, maintain the purchasing power of pensioners and above all ensure the future,” Álvarez stressed after the agreement on Monday.