Introduction to the New Pension Solidarity Contribution
The Spanish government, under Pedro Sánchez, has introduced a new measure that has sparked concerns among citizens. Effective from January 1, 2025, individuals earning over €56,600 annually will be subject to an additional contribution aimed at sustaining the pension system. However, it’s important to note that this contribution won’t translate into higher pension payouts upon retirement.
Explanation of the New Regulation
The recently enacted Royal Decree-Law aims to generate additional revenue from high-earning workers whose incomes exceed the maximum contribution base. This move is intended to address a disparity with European standards, as Spain’s maximum contribution base and average salaries are lower compared to other European countries. Consequently, the government asserts that there are workers who aren’t contributing based on their entire salary.
Under this regulation, the upper contribution limit will be adjusted annually based on inflation plus an additional 1.2% surcharge, gradually targeting higher-income earners. This measure supplements the Intergenerational Equity Mechanism, thereby imposing an additional burden on Spanish workers to bolster pension revenues, as advocated by José Luis Escrivá, the Minister of Social Security.
Key Aspects of the Pension Solidarity Contribution
The implementation of this contribution will be gradual, starting at 1% in 2025 and increasing by an average of 0.25 percentage points annually until reaching 6% in 2045 (with 5% borne by the employer and 1% by the employee).
The contribution will be applied in three tiers initially: an additional 0.92% contribution (for salaries between the maximum base and 10% above it), 1% (for the range between 10% and 50% above the maximum base), and 1.17% (for salaries exceeding 50% above the maximum base).
Following a pension reform enacted a year ago, this new solidarity contribution will be structured based on salary tiers. The goal is to set the contribution rate at 5.5% for salaries between the maximum base and 10% above it, 6% for salaries between 10% and 50% above the maximum base, and 7% for salaries exceeding 50% above the maximum base. However, this contribution won’t apply to self-employed workers.
Implications of the Solidarity Contribution
It’s important to note that the solidarity contribution is redistributive rather than contributory. Therefore, it won’t enhance the benefit base used to calculate future pension payouts for contributors and could even be considered a tax. While it may help mitigate the impact of the “baby boom” generation’s retirement, it’s not expected to directly impact pension amounts or increase retirement benefits.
Analysis of Social Security Deficit
Recent data indicates that Spain’s Social Security closed 2023 with a deficit of €8.627 billion, equivalent to 0.59% of GDP. This marks a 21% increase compared to the €7.123 billion deficit recorded in 2022. The deficit represents the difference between recognized rights (non-financial income) of €201.317 billion and recognized obligations (non-financial expenses) of €209.944 billion.
In terms of social security contributions, revenues increased by 10.3% year-on-year to €154.633 billion, representing a €14.385 billion increase from 2022, driven by improved employment rates.
In the first two months of 2024 alone, Social Security recorded a negative balance of €363 million, equivalent to 0.02% of GDP. This occurred despite generating €31.317 billion in revenue, a 7.5% increase from the previous year, against expenses totaling €31.680 billion.
Additional Considerations
Furthermore, the Royal Decree amends the General Collection Regulations to clarify conditions for installment payments for improperly received benefits, setting a minimum monthly amount of €100 and a maximum repayment period of five years. Additionally, it extends the obligation of direct debit for contributions for workers in the Special System for Agricultural Workers during inactive periods, enhancing legal certainty in payment processing.