Understanding Retirement and Pension Systems in Spain
Retirement is the name given to the administrative act that allows individuals to cease gainful employment, either on their own or for someone else, after reaching a certain legal maximum age. This act is often associated with a passive state of employment. Upon termination of employment, the beneficiary of the pension is credited with an economic benefit, which is usually a monthly rent. The provision is for life and is only extinguished with the death of the interested party. The termination of work can be voluntary, and it is not necessary to reach a certain age; however, in most countries, regulations establish a retirement age around 65. This limit is currently being reviewed in different countries due to increased life expectancy, which raises the social cost of pensions and requires more income to support modern pension systems.
There are two types of retirement: contributory and non-contributory. The contributory form is financed by contributions made to the system by the workers themselves through their contributions or those of the companies they serve or have served. The non-contributory form is aimed at those who lack resources or who have not contributed enough to benefit from the other modality.
Requirements for Retirement in Spain
To retire in Spain, one must be enrolled in Social Security in any of the covered regimes (General Scheme, Special Scheme for Sea and Mining, etc.). The minimum age for retirement, as discussed above, is generally 65. This age may be lower in the following cases, provided that workers are registered or in an equivalent situation:
1. From 61 Years and Fulfilling the Following Conditions:
- The termination of work or the end of the contract has not been the will of the worker.
- Demonstrate a minimum contribution period of 30 years.
- Be enrolled in employment offices (INEM) for a minimum of 6 months before applying for retirement.
In these cases, the final pension shall be reduced by applying reduction coefficients, as follows:
- With 30 years of contributions: 8%
- Between 31 and 34 years: 7.5%
- Between 35 and 37 years: 7%
- Between 38 and 39 years: 6.5%
- With 40 years and over: 6%
2. Those Who Have Contributed Before January 1, 1967:
These workers are entitled to apply for retirement after 60 years and will face an 8% reduction for each year remaining until they reach age 65. Depending on the years of contributions (with a minimum of 30 provided), workers benefiting from early retirement will have reduction factors applied as per the previous table.
3. Partial Retirement Worker (Contract Relay):
From 60 years, partial retirement is possible for the worker, under a series of conditions. A worker who wants to retire can negotiate with the company a decline in working hours and salary, with percentages ranging from 25% to a maximum of 85%. This worker, referred to as the relieved worker, must work the remaining time up to 100% of the time. For example, if they enter into a reduction of 85% of time, they must work 15%, which can be distributed at their convenience, in agreement with the company. A retirement option must accompany a replacement contract, meaning the company must set a new contract with another employee who replaces the former for at least the duration of the latter’s reduced hours. The replacement contract must last until the same day the relieved worker accesses full retirement status, i.e., when they turn 65. The relieved worker will receive an amount from the TGSS for the reduced time and another quantity that the company will continue to pay for the remainder.
Amount of Pension
The initial amount of the pension, in principle, does not change throughout the retired life, beyond the increases set by Social Security or the corresponding Ministry in conjunction with the Consumer Price Index. To calculate this amount, the regulatory basis for the past 15 years of the worker is taken into account. The basis for the last 2 years (24 months), known as the reference period, is counted at face value. The basis for the remaining months is updated according to changes in the Consumer Price Index. The sum of the amounts of each month (180 in total) is divided by 210 (12 + 2 extra payments in 15 years), and the result will be the base figure for the amount of the pension.
Lagoon Quotes:
If, during the 15-year period of base salary computation, there are months without contributions or if contributions have been lost, the bases for these months will be the minimum contribution bases established for these periods for workers over 18 years. It is generally regarded as the minimum basis for the interprofessional minimum wage (SMI) increased by one sixth.
Moonlighting Status:
In cases of multiple employment, where the employee has performed their activity simultaneously in two or more separate businesses, the total levy bases computed at these companies are considered for the calculation of the base pension, ensuring that the maximum contribution limit is not exceeded.
Future of Pensions
The aging population in many countries, due to a fertility rate that has been very low for many years and even tends to fall further in some areas, endangers the public pension system.
The most novel and useful proposition from the 2005 report of CESifo (consisting of the Center for Economic Studies at the University of Munich and the ifo Institute) suggests that income tax differences established by the number of children can provide more incentives to have children. Specifically, the report proposes partial indexing of pension entitlement to public funding based on the number of children. That is, families with more children should pay less into the pension system and, when they retire, receive a higher pension than those who opt for a low birth rate or choose not to have children.
It should be noted that, compared with the limited support offered by the administration in some countries (such as Spain), many countries in the European Union offset the costs of raising an increasing number of children with higher reductions in income tax and more substantial aid to large families.