Given the current global economic crisis, the debate on the reform of Spain’s public pension system is now focusing on the need to limit rather than eliminate early retirement schemes as a means of adjusting the workforce. In any case, the preliminary work towards the renewal of the Toledo Pact does not envisage in-depth reforms of the public pension system, as the latest government forecasts indicate that the pension budget will be sustainable for the next 20 years.
On 14 October 2008, the Spanish Prime Minister, José Luis Rodríguez Zapatero, and the President of the main opposition People’s Party (Partido Popular, PP), Mariano Rajoy, agreed to start negotiations on the Toledo Pact – a report on the future reform of Spain’s social security system, agreed by the most representative social partner and political organisations and the government (ES0106244F). A central aim of the discussions is to progress towards a more sustainable public pension system.
Work towards renewing the pensions agreement is currently underway in the parliamentary commission responsible for monitoring the development of the pact. However, in-depth reforms of the system are not envisaged as the government’s forecasts indicate that the budget for the public pension system is guaranteed for the next 20 years. Instead, amid the current climate of recession and increasing unemployment (ES0809019I), the debate on the reform of social protection has refocused on the suitability of early retirement as a way of adjusting the workforce in companies and sectors undergoing economic difficulties.
Favourable outlook for public pension system
According to a forecast of the National Pension Strategy, the pension system’s revenue will be sufficient to cover expenditure until 2023. Only then will it be necessary to use the country’s Reserve Fund, which by then is expected to reach about 6.5% of gross domestic product (GDP), and will guarantee the viability of the current system until 2029 (ES0706019I). These forecasts are considerably better than those made in 2005, when it was estimated that the public pension system budget could only be guaranteed until 2015.
The system has been reinforced by a growth in the economy and employment in recent years – especially owing to the higher participation rate of women and the integration of foreign workers into the labour market. Furthermore, the latest reforms to the social security system, such as Law 40/2007 on social security measures (ES0712019I), which includes incentives for extending working life, have increased the government’s scope for reforming the system.
Proposal to extend calculation period for retirement benefit
Meanwhile, the parliamentary groups of the conservative parties have announced that they will be proposing an extension – from 15 to 20 years – of the calculation period regarding contributions for retirement benefit. This is a controversial initiative, as a longer calculation period for people whose working lives are discontinuous may lead to a lower benefit amount. The governing Socialist Workers’ Party (Partido Socialista Obrero Español, PSOE) has stated that it is willing to discuss this measure in the framework of the renewal of the Toledo Pact. The aim of the two main political parties is to reach an agreement by mid 2009, after which they will present it to the social partners, hoping to bring the changes into force by 2010.
Controversy over early retirement
One of the issues that has generated the most controversy is the government’s overall aim to restrict the use of early retirement as a means of adjusting the workforce. The government has now announced its intention to modify the legislation in order to allow workers taking pre-retirement (prejubilacion) through a redundancy procedure to obtain new jobs that are compatible with the compensation awarded to them.
At present, many companies continue paying contributions for these workers until the legal retirement age of 65 years, whereas the unemployment benefit is paid by the state. The aim of this measure is to dissuade companies from using redundancy procedures, as it would allow a pre-retired worker to take a job with a competing company on a lower wage. This solution was applied in the last redundancy procedure presented by Telefónica, which proposed pre-retirement at the age of 48 years. The company agreed to pay for relocation, training and reintegration costs in order to help the affected workers find a job either within or outside of the company.
Furthermore, without prejudice to the above, the aim of Law 40/2007 is to improve the pensions of pre-retired workers with more than 35 years of contributions by lowering the reduction coefficients that are applied for each year remaining until the legal retirement age.
Commentary
Although the extension of working life is among the government’s aims in the reform of the country’s social security system, the current economic situation has led it to reconsider early retirement as a way of facilitating workforce adjustments in sectors in crisis – as recommended by trade unions in the construction sector (ES0810039I). In fact, pre-retirement has already been used as an effective measure for adjusting workforces in sectors such as metalworking, financial services and telecommunications (ES0011221F).
Juan Arasanz Díaz, QUIT, University Autònoma of Barcelona (UAB)