Spain's coalition government strikes deal on pensions, shifting cost to high earners

Belén Carreño
Fri, 10 March 2023

 A pensioner looks at the street from her balcony in Barcelona

By Belén Carreño

MADRID (Reuters) - Spain's Socialists and their junior coalition partners Unidas Podemos have struck a deal on changes to the pension system that will put most of the additional cost on its highest earners, government sources said.

The overhaul is a key requirement by Brussels for Spain to access a fourth tranche of European post-pandemic recovery funds and has caused dispute within the coalition government as it seeks to hike revenue without penalising future pensioners.

Prime Minister Pedro Sanchez said the proposals would provide stability for a pension system under pressure with one of Europe's largest ageing populations.

Revenues will increase by 15 billion euros ($16 billion) a year, representing a rise of three percentage points of gross domestic product by 2050 and reducing to 15.5% of GDP the burden of pension payments on the budget.

A government source told Reuters that Madrid had received positive preliminary feedback from the European Commission about the proposal. A Commission spokesperson said they had been informed but that official opinion would not come for some months.

Other countries in Europe are also changing their pension systems. Fierce, cross-sectoral protests have raged in France in recent weeks over plans to cut benefits or extend the retirement age for pensioners by two years to 64.

Spain carried out a major pension reform in 2011 when it raised its retirement age to 67 but that proved insufficient to offset the high costs of the system, which has come under pressure from measures such as the raising of pension payouts in line with inflation.

'ENDANGERING JOB CREATION'

The government plans to press ahead in spite of opposition to the proposal by Spain's main business association, the CEOE.

The reform "will reduce the wages of all workers and increase labour costs, endangering job creation," CEOE said in an emailed statement.

A so-called "solidarity tax" will remove tax exemptions from social contributions for high earners, from salaries above 54,000 euros a year. The new tax, paid by earners' employers, will start at 1% in 2025, rising to 6% by 2045.

The government also plans to double from 0.6% a recently-introduced social contribution known as the "Mechanism of Intergenerational Equity" designed to generate further revenue.

Total labour costs for companies paying the highest salaries will increase by seven percentage points, in line with the European average, government sources said.

Although the government does not have a parliamentary majority, other left-wing parties are expected to support the reform if it is backed by unions, which said in a statement that they saw it "positively".

The government is proposing to raise the minimum number of years of contribution to 29 years from 25 years, a key aspect of the reform required for Brussels' approval. However, it is offering to make the increase voluntary until 2044, to facilitate an agreement from unions.

($1 = 0.9383 euros)

(Reporting by Belén Carreño; Writing by Charlie Devereux; Editing by Aislinn Laing and Angus MacSwan)