Pre-retirement systems examined

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In Spain, there is a complex system of different forms of retirement, including retirement at the normal age, early retirement and 'pre-retirement'. This feature examines the various forms of pre-retirement - whereby older workers workers give up their jobs and receive compensation, rights to social protection and a supplement from the company. The government and social partners have differing views on the issue.

The rapid process of industrial restructuring has sometimes been dealt with in Spain through the use of 'pre-retirement' (prejubilación). Pre-retirement is taken before the age of normal retirement, at 65, and even before the right to early retirement - which is now allowed from the age of 61 (ES0106244F and ES0201250N) and offers a lower pension to workers entitled to it, subject to certain requirements.

Pre-retirement in detail

Pre-retirement involves an agreement through which workers give up their jobs and receive compensation, rights to social protection and a supplement from the company. For the workers concerned, this means giving up the benefits to which wage earners are entitled, and receiving an income as an unemployed or inactive person rather than an occupied and active person. In general, it involves the termination or suspension of the employment contract. Pre-retirement is generally viewed as a 'non-traumatic' form of workforce reduction that is often accepted by trade unions as an acceptable form of job loss. Table 1 below shows the development of pre-retirement over the 1990s.

Table 1. No. of workers taking early retirement, 1990-9
Year Total Industry Coal mining Other companies
1990 1,349 - 290 1,059
1991 1,122 - 163 959
1992 1,544 - 229 1,315
1993 1,293 - 139 1,154
1994 2,163 457 862 844
1995 2,499 1,202 783 514
1996 2,066 1,076 287 703
1997 1,848 1,109 105 634
1998 2,102 1,352 155 595
1999 2,200 1,195 73 932
Total 18,186 6,391 3,086 8,709

Source: Ministry of Labour and Social Affairs.

Pre-retirement normally involves receiving: supplements from the employer until the age of retirement or early retirement, or even for life, according to the case; basic entitlement to unemployment benefit; welfare benefits (if applicable); state subsidies (according to the situation of the company); and a pension (an early retirement pension or otherwise) when the time arrives.

In respect of pre-retirement, the state provides funds and state subsidies as part of redundancy procedure s (Expedientes de Regulación de Empleo, EREs) - except normally in the banking sector - and the social security system provides unemployment benefit, with a system that allows workers to obtain their pension at the legal age by making some contributions. Pre-retirement reduces employment, so it also reduces the number of taxpayers and contributors to the social security system - except when a 'special agreement' (as laid down in: Order of 18 July 1991, BOE 30 July; Ministerial Order [OM] 18-1-95 Ad 16 and 21; Royal Decree [RD] 2064/95; and OM 15-1-99) to continue paying contributions is applied. The various sources of income for employees taking pre-retirement, compared with other forms of retirement, are set out in table 2 below

Table 2. Sources of income for employees taking pre-retirement, compared with other forms of retirement
Funding of the income Pre-retirement (before legal retirement age) Normal/early retirement
From the employer Supplements- these take the form of: supplements laid down by agreement, to bring the income up to a certain percentage of the agreed pensionable wage (adding up all income items); and compensation to be paid, sometimes gradually, until a pension is received. Supplements- these may be laid down by agreement, to bring the income up to a certain percentage of the agreed pensionable wage (adding up all income items).
From the state (central or regional government) Unemployment benefit- when the pre-retirement arises from a redundancy procedure, this normally extends to retirement age. Welfare benefits- these may be paid in cases of difficulty from the age of 52. State subsidies- these apply mainly in cases of sectors being restructured (through redundancy procedures). Early retirement pension- this may be received between the ages of 61 and 65, and reduces the amount of the final pension. State pension- payable from the age of 65.
From the worker If the employee is covered by a contributory occupational pension scheme- the employee is entitled to his or her accumulated personal right to a pension. Sometimes, particularly if the fund is company-based, the supplement (see above) is funded by the company with the overcapitalised amount of the pension funds. If the employee is covered by a contributory occupational pension scheme- the employee is entitled to his or her accumulated personal right to a pension.
By 'special agreement' (see main text) Unemployment insurance contributions paid by the employer or the unemployed person, according to the specific pre-retirement agreement. While the amount of contributions is reduced, this allows workers to make up for years lost or reach the number of years of contribution to obtain a pension. .

Source: drawn up by the author.

Types of pre-retirement

Pre-retirement can take several forms, depending on various factors, as follows.

  • Industrial restructuring. There are two types of pre-retirement under this scheme. Workers aged 55 to 60 years receive from the National Institute of Employment (Instituto Nacional de Empleo, INEM) contributory unemployment benefits for two years and welfare benefits for three years, while the company pays them up to 80% of their average gross wage over the six months prior to pre-retirement. For workers' aged 60 to 65 years, the scheme differs in that company pays up to 75% of the previous wage, and the government pays subsidies calculated on the basis of a reduced pension.
  • Subsidies prior to ordinary retirement, applicable to companies in crisis. In the case of pre-retirement in such companies, this applies to workers over 60 years of age. They receive an income of 75% of the basic income on which social security contributions are calculated, with the company paying 60% and the Directorate-General of Employment (Dirección General de Trabajo) 40%;
  • 'Industry law' (Ley de Industria) scheme. This applies to companies subject to an 'industrial promotion' programme. Workers aged 52 to 60 receive contributory unemployment benefits from INEM and, after two years, welfare benefits and supplements agreed with their employer. Workers aged 60 to 65 receive benefits prior to ordinary retirement.
  • Coal mining scheme. Over 1998 to 2005, some 11,000 miners under the responsibility of the Ministry of Industry and Energy are taking pre-retirement (ES0203208F). Workers aged over 52 years are entitled to contributory unemployment benefit for two years, whereafter they receive welfare benefits. As a supplement, the Ministry tops up the workers' income to 78% of their previous gross wage
  • Social plans. Pre-retirement may be introduced as part of a redundancy procedure for workers aged 52 to 60 years. If they have paid the relevant contributions for over six years they are entitled to two years of contributory unemployment benefit, and then receive welfare benefit. Their income is a combination of compensation from the employer, unemployment benefit and state subsidies.
  • Pre-retirement without state subsidies (except unemployment benefit and pensions). This is based on individual or group agreements between a large company - almost always in the banking sector - and older workers. It is normally funded from the reserves or profits of the company, but it is calculated that the long-term saving for the employer arising from a pre-retirement can allow approximately two young workers to be recruited.

Pre-retirement and dismissal

Pre-retirement is considered as a form of 'involuntary' dismissal. The various types of involuntary and non-involuntary dismissal are listed in table 3 below.

Table 3. The various types of dismissal
Involuntary Non-involuntary
Redundancy procedure (Expediente de Regulación de Empleo) - regulated collective dismissal with minimum guarantees. Justified dismissal (despido procedente) - dismissal with the minimum compensation.
Unjustified dismissal (despido improcedente) - individual dismissal with compensation. Voluntary redundancy (baja incentivada) - voluntary departure, with greater compensation, without the right to unemployment benefit.
Pre-retirement- dismissal, collective or personal, with agreed guarantees. Non-renewal of contract (no renovación del contrato) - termination of contract which is not legally considered as dismissal.

Source: drawn up by the author.

As indicated by table 3, pre-retirement is regarded as one of three forms of 'involuntary' dismissal, with the others being redundancy procedures (EREs) and unjustified dismissal.

Under an ERE (as laid down in: Legislative RD 1/95, Articles 47, 49, 51; Legislative RD 2/95; RD 43/96; and RD 140/97) all workers made redundant, for regulated reasons, receive compensation. Through this mechanism the company can dismiss a group of workers, suspend their contracts or reduce their working time, provided that it fulfils certain requirements and offers certain guarantees that are monitored by the competent authorities and negotiated with trade unions. The ERE is a special administrative procedure aimed at suspending or terminating the employment relationship. The reasons may be economic, technical or organisational, or related to production, force majeure or the winding-up of the firm. 'Preventive' EREs are used by companies to reduce the workforce even if there are no economic difficulties. In this case, workers made redundant are entitled to compensation of 20 days' pay per year of service, with a maximum of 12 months' pay. If the company has fewer than 25 workers, 40% of the minimum compensation for the redundant workers is paid by the Wages Guarantee Fund (Fondo de Garantía Social, FOGASA). In all cases, the compensation is paid over the whole period following redundancy up until retirement, in order to supplement benefit income and, under the 'special agreement' (see above), the workers concerned continue to pay social security contributions over this period. The workers are entitled to unemployment benefits until they reach retirement age.

The compensation for unjustified dismissal is higher, though it was reduced by the most recent labour market reform (ES0103237F). This system is the most expensive for the company.

In summary, among the three forms of involuntary dismissal, pre-retirement is the system that is regarded as providing the best guarantees for individual workers.

Turning to 'non-involuntary' forms of dismissal, these include justified dismissal — due to breach of the employment contract by the worker — and voluntary redundancy (voluntary for both parties). Voluntary redundancy, another form of dismissal, involves waiving application of the 'special agreement' (see above), with voluntary termination of the employment contract. The workers lose their entitlements with regard to the company pension fund, unless there is an agreement otherwise, but normally receive a greater amount of compensation. The aim of this greater compensation is to give workers a lump sum, and to pay the remaining contributions necessary to obtain a state retirement pension. They normally do this by registering as self-employed workers. They thus lose all ties with the company.

Costs and savings

For employers, using pre-retirement involves costs in terms of paying for the various supplements and compensation for the workers concerned from their profits, reserves, operating costs or pension funds. However, they make savings in that they no longer have to pay the workers' normal wage until retirement, or their social security contributions, except where a special agreement to continue paying contributions applies. There may be tax savings, depending on the company's accounting - with the permission of the labour authorities, companies may charge their pre-retirement costs to reserves, profits or expenditure. Furthermore, new recruits will earn less than the older workers taking pre-retirement.

The costs of pre-retirement for the public authorities include: the subsidies provided by the regions (autonomous communities) out of taxation; and the unemployment benefit, benefits and subsidies paid by the social security system.

For the workers involved, pre-retirement involves a non-traumatic end to their career, with income at a level higher than if they had lost their jobs in an uncushioned way. However, there are costs in that their total income is reduced. Although they receive an income and various benefits until retirement, the lose out on various items that they would have received if they had stayed in employment. As well as their basic wages and annual increases, they do not receive various supplements and bonuses - notably seniority increments, variable pay and productivity bonuses - or other non-pay benefits. Furthermore, their early withdrawal from the labour market means the loss to the system of their social security contributions and their tax payments.

In general, the government is attempting to reduce the use of the pre-retirement system because it involves an increase in social expenditure. The employers and their organisations tend to use it as a non-traumatic form of dismissal, introduced through negotiations with the trade unions. The employers claim that it facilitates social peace in restructuring processes, whereas the unions claim that it is a 'lesser evil' but conceals a loss of jobs, social security contributors and taxpayers.

Commentary

Pre-retirement means the withdrawal from the employment relationship of workers who are still at an age suitable for employment and have valuable experience, in exchange for a lower income (a pension and supplements), which is partly funded by the state. In the medium term this system reduces wage costs for companies, because it enables them to rejuvenate the workforce by recruiting or subcontracting a new generation with fewer employment rights (eg more temporary contracts, fewer social benefits, less social protection and more flexible dismissal) and at a lower cost. Furthermore, pre-retirement is no longer always associated with major restructuring processes or situations of crisis, but is simply a mechanism used by some companies to increase flexibility. In summary, pre-retirement leads to an increase in unemployment and in the expenditure of the social security system (which is of great concern to the government). It is thus a problem that is representative of the model of employment being introduced in Spain through a change of generation in the workforce. (Daniel Albarracín, CIREM Foundation)

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