Pension reform: a new plan

Pension reform: a new plan

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01.Nov.2020

Almost five years since the previous agreement, the Toledo Pact now aims to promote a new plan. We explain the most important points below.

The Monitoring and Evaluation Commission of the Toledo Pact – the body in charge of ensuring the sustainability of the Spanish pension system – has recently approved a series of recommendations for the future reform of the pension system, an item still pending on the government’s agenda. Almost five years since the previous agreement, the aim of the Toledo Pact now is to promote a new plan that urgently needs to be implemented, especially due to the impact that the pandemic is going to have on Social Security accounts. Would you like to know the main lines of these recommendations?

Two commitments

Keep in mind that these recommendations address two main commitments: towards pensioners, who will see their pensions increased in line with the CPI (one of the main demands of this group); and towards the pension system itself, the aim being to clear out the inappropriate expenses it has been bearing which amounted to about 20,000 million euros. These expenses include part of non-contributory benefits (care-related), employment incentive policies through quota reductions, family support policies, and operating expenses. Some of these items, according to these recommendations of the Toledo Pact, should be charged to the General State Budgets. By removing them from the Social Security accounts, the system’s deficit could be eliminated.

The best years of our working life

You will be interested to know that the State is retaining the 15-year minimum contribution period to be able to get a contributory pension, as well as the 25-year period for calculating the regulatory base of the pension to be received. Something important to note is that the door has been left open for salaried and self-employed workers to choose “your best years of contributions” to do the final calculation.

Private savings

One of the most interesting points of this new reform is the decision to give a boost to company pension plans to increase the private savings base in Spain, which is well below the average of neighboring countries in the European Union. It turns out that in Spain only 26% of the working-age population is covered by a private social security instrument.

Three complementary pillars

UNESPA, the insurance company employers’ association, sees it as “absolutely necessary that mandatory pension systems (first pillar) be complemented with professional collective pension systems (second pillar) and with additional individual products (third pillar)”, according to the president of UNESPA, Pilar González de Frutos. This reform aims to reduce incentives for individual products by lowering the tax deduction limit from 8,000 to 2,000 euros, compared to collective products (business-related), whose limit increases from 8,000 to 10,000 euros. This is a very important point, since the tax benefits that apply to these savings products is key to promoting them.

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