The Spanish Old Age Security System in 2020

By Thais Guerrero Padrón,  University of Cádiz and Cristina Sanchez Rodas,  University of Seville

Although it was an ancient practice of the Spanish monarchy to grant the mercy of an economic income when the loyal servants left their offices due to old age, the historical background of the current old age pension system in Spain dates back to the beginning of the 20th century, when social insurances were introduced. In 1908, the state regulated by law a voluntary retirement pension for workers.¹ In 1919, the compulsory workers' retirement scheme (Retiro Obrero Obligatorio) was created intended for employees whose remuneration did not exceed a certain limit.²  In 1947, the old age and disability insurance  (Seguro Obligatorio de Vejez e Invalidez,  SOVI) was established.³ Public social insurances such as old age insurance offered only minimal, even insufficient, protection to workers, which led to the emergence of the mutual society  (Mutualismo Laboral) in 1954, a form of complementary and public protection on a company-professional basis.⁴ Under Franco´s dictatorship the Social Security Law  (Ley de Seguridad Social)  was enacted in 1966. One of its pillars was the compulsory old age pension established for employees and the self-employed.⁵ After the establishing of democratic order, the management of old age pensions was assigned to the National Institute of Social Security  (Instituto Nacional de Seguridad Social). In the decades that followed, the rules and conditions for the eligibility and calculation of public pension benefits were subject to many reforms.⁶ The legislator aims to provide a ‘standard level of protection’ in old age through mandatory insurance in the general contributory public pension scheme and special public schemes for specific occupational groups. Persons can decide to ‘top up’ public benefits of the compulsory system by voluntary participation in occupational and private pension schemes which are complementary to the public and compulsory system. Until today, these schemes have not taken root or developed in Spain in the way intended. However, they are expected to gain importance in the near future, as the public pension system is currently undergoing a major reform process to address new (and old) social and economic challenges, which will likely result in a decline in the protection level of the public system. A minimum subsistence level of protection for elderly persons is guaranteed by the pension system via minimum supplements (of a non-contributory nature) to contributory pensions for persons with low (pension) income and means-tested non-contributory old age pensions for elderly persons in need.

Standard Protection in Old Age

Statutory old age pension insurance is mandatory for the entire workforce in Spain. All employed and self-employed workers are mandatorily insured in a contributory public pension scheme of the social security system, organised into a general schemeand several special schemes for specific occupational groups. The general scheme (Régimen General) serves currently as the reference model throughout the social security system and covers the vast majority of employed and assimilated workers in industry, agriculture and services. The special scheme for self-employed workers (Régimen Especial de Trabajadores Autónomos) protects persons who habitually, personally and directly perform a profit-driven activity without an employment contract. As such, it covers all self-employed persons, with the exception of self-employed sea workers. The special scheme for sea workers  (Régimen Especial de Trabajadores del Mar) insures employees and self-employed workers engaged in maritime and fishing activities. As a peculiarity for the purposes of setting the contribution base, this scheme classifies workers into different groups according to the activity carried out, their professional category and the maritime area in which they operate. The special scheme for coal mining workers  (Régimen Especial de la Minería del Carbón) has the lowest number of insured workers and covers employed workers engaged in activities related to coal mining. All public schemes are pay-as-you-go (PAYG)-financed with lifelong benefits being linked to contribution payments.⁷ All schemes are managed by the National Social Security Institute (Instituto Nacional de la Seguridad Social, INSS) with the exception of the special scheme for sea workers which is administered by the Marine Social Institute  (Instituto Social de la Marina, ISM).

Originally, the civil servants´ pension scheme  (Régimen de Clases Pasivas) insured all career civil servants of the State Administration, the Administration of Justice and career members of the Armed Forces and the Navy. As of 1 January 2011, the pension scheme was closed for new appointees and new civil servants of the state have joined the general scheme, maintaining special pension rights when it comes to the standard retirement age.⁸ In the past, other groups had already been integrated into the general scheme or the scheme for self-employed workers, such as persons working in the agricultural sector. The current structure of public pension insurance is expected to disappear in the medium or long term, resulting into a two-regime structure with one scheme for the employed and another for the self-employed population.

Top-Ups

Public pension benefits can be topped up through participation in fully funded occupational or private pension plans. Benefits are complementary to public pensions, but in no case do they replace them. Participation is voluntary but incentivised by tax deductions on contribution payments. Three types of pension plans exist: occupational pension plans (planes de pensiones del sistema de empleo) promoted by any company or entity with the aim to provide supplementary insurance to their employees; private associated pension plans (planes de pensiones del sistema asociado) promoted by any association or trade union providing insurance for their members; and private individual pension plans (planes de pensiones del sistema individual) which can be contracted by any person with one or more financial institutions such as banks, insurance companies or pension fund managers.

Minimum

To guarantee a minimum pension level, pensioners with contributory pensions below the minimum pension amount fixed annually by law will receive a supplement if they fulfil certain requirements. These minimum supplements to contributory pensions  (complementos a mínimos de las pensiones contributivas) are non-contributory in nature and are financed from the general state budget. For elderly persons who do not qualify for contributory pensions (including the minimum supplements), the pension system guarantees a minimum income level through public non-contributory old age pensions (pensiones de jubilación no contributivas). These benefits are means-tested and provided to citizens over 65 years of age and in a state of need. They include a financial benefit, free medical-pharmaceutical assistance and complementary social services. Outside the pension system, the Autonomous Communities are competent to regulate old age assistance allowances. They can also legislate supplements to non-contributory pensions of social security for those who have the status of beneficiaries of such pensions. These supplements are characterised by being extraordinary in nature and paid out in a single payment from the budgets of the Autonomous Communities themselves.

¹ These pensions were managed by the Institute of Social Welfare (Instituto Nacional de Previsión) and financed with contributions from the beneficiaries.

² It guaranteed a retirement pension at the age of 65 financed by companies and the state, until it was transformed into an old age subsidy in 1939.

³ The pensionable age was 65 years and it was managed by the Institute of Social Welfare.

⁴ This residual form of protection is still mentioned today when referring to the old age pension because of the existence of workers who have been contributors to one of the mutual insurance companies.

⁵ Pensioners were required to accredit a prior contribution period of 10 years. The retirement age was not modified.

⁶ In 1985, the contribution period necessary to access the retirement pension was extended from 10 to 15 years. In 1990, a non-contributory level of social security was implemented and a non-contributory old age pension was created. For a long period, legislation stabilised, partly due to the incipient development of pension plans and funds. As a consequence of the economic crisis of 2008, important reforms were adopted: Law 27/2011 increased the age of access to the retirement pension from 65 to 67 years as of 2027. It was the first time since 1919 that the retirement age has been increased. The determination of the years quoted for the calculation of the regulatory base also increased from 15 to 25 years. And to obtain 100% of the regulatory base it now takes 37 years instead of 35. The sustainability factor was introduced by Law 23/2013, but its entry into force was suspended.

⁷ There is no specific contribution for retirement pension. Retirement falls under the legal concept of common contingencies along with other social risks (common illness, non-occupational accidents, etc.). The contributory retirement benefit will be unique for each beneficiary and will consist of a lifelong pension granted by the general or special social security scheme to which the beneficiary is affiliated when the social risk materialises, provided that the legal requirements of age, minimum contribution periods and causal event are met. Pension is eligible under the last scheme to which he/she was affiliated, provided that all the requirements for obtaining the pension are met by the beneficiary. If the beneficiary does not qualify for a retirement pension under any social security scheme, the competent scheme is the one under which she/he has the highest number of social security contributions.

⁸ As the civil servants’ scheme is closed for new entrants, the scheme is not pictured in the Pension Map for Spain.