Spain moves from stick to carrot to persuade later retirement

Spain has the longest life expectancy in Europe and one of the lowest fertility rates. Its social security budget, with 30 billion euros of annual losses, is set to be the biggest overall contributor to the overall public deficit next year.

The country is still in the throes of a profound reform of its earnings-related public pension system launched in 2011. It will gradually increase the legal retirement age to 67 in 2027 from 65 years and 10 months now and introduce rules to tighten access to a full pension.

But at the halfway point of this reform, the government has concluded that the measures are having little effect and that more and more Spaniards are using existing leeway to bring their retirement age forward. Last year, almost 16% of voluntary retirements were early, compared to 8% in 2011.

The average retirement age is 64 years and 6 months. Now after getting parliament’s backing in late-October for new reforms – a rare case of consensus among Spain’s fractious political parties – the government wants to adjust the balance of penalties and incentives so as to persuade Spaniards to decide voluntarily to delay their retirement with a more positive approach.

A definitive draft still has to be approved by the cabinet and then go back again to the Parliament for the final vote.

Given that the pension in Spain is capped at 2,683 euros, the existing penalty for early retirement is hardly felt by those on the highest salaries. At the same time, the bonus for retiring later is merely an additional 3.2% average in rewards – compared to around 10% in Britain and 6% in Germany.

Beyond adapting rules for receiving the bonus, the government plans an awareness campaign to tell Spaniards that it actually exists.

“Tens of thousands of workers retire just a couple of months before reaching 67 years old, thus losing an additional 2% bonus. We understand that this irrational behaviour is due to a lack of information and we want to change it,” said a senior official from the Social Security Ministry.

A big part of the plan to eliminate the social security deficit is an accounting effect: the government will simply shift 14 billion euros in expenses from the social security accounts to the central government budget.

But long-term, it is looking for more structural changes.

One bottleneck identified is that many collective bargain deals do not allow workers to continue beyond the legal retirement age, so the Government is looking to persuade wage negotiating partners to remove this barrier.

From next year they will cut tax relief for private plans in favour of company plans and create a public-private umbrella pension fund, inspired by Britain’s NEST model, to help Spain’s army of small businesses to provide their workers with pensions.

Ignacio Conde Ruiz, one of Spain’s leading pension experts, said Madrid had to take further steps but to persuade people to work longer if it is to achieve another goal of improving pensions in line with inflation.

“We need to introduce measures to contain spending to offset future deficits, which will be in the region of 3% or 6% of GDP depending on the demographic scenario,” he said.

REUTERS