Editor’s note: This article was first published in June 2011, while Spain’s pension reform was still going through parliament. It became Law 27/2011 that August and was phased in from 2013; the rules, calculation periods and examples describe the 2011 proposal, and the rules on interns and graduate contracts have since changed.
Under the new pension reform, people will be able to retire at 65 as long as they have paid contributions for 38.5 years. For everyone else, the legal retirement age will be 67. This opens up some controversial issues, such as the situation of today’s university students. For a young person to be able to retire at 65, they will need to start working (and paying contributions) by age 26.5 and keep going without interruption. In other words, they can’t have the bad luck of being unemployed for a while, because if that happens, their retirement plans could fall apart.
On top of that, there’s another problem facing highly qualified people: they will struggle to get into companies without first jumping through the hoop of being interns rather than employees. Until the new rules on hiring interns are settled and confirmed, the current situation allows a university graduate to be given as many “trial” contracts as different tasks and roles they are assigned. Put simply, a graduate could have a two-year trial contract in an administrative role and, when it ends, the same company could give them another trial contract in a department with different duties, such as Human Resources.
The problem with interns is that they join the labor market late, because companies don’t consider them ready straight out of university. So a new graduate can easily spend two years as an intern and another four on trial contracts. It’s an ideal system for making sure young people don’t start building up a decent contribution record until they’re past 30, not to mention the companies that will take advantage of this, within the law, to staff themselves year after year with a constant flow of interns.
Now, about the pension reform
Calculation base: Until now, the pension has been calculated by taking the worker’s contribution bases over the 180 months (fifteen years) before retirement and dividing the total by 210. This calculation takes inflation into account. The reform extends, in two steps, the number of years used for this calculation: first to 20 and then to 25 years.
Example: Imagine someone who, from age 40 to 50, paid contributions equivalent to 1,000 euros a month in today’s money. At 50 they got a raise and started contributing 1,500 euros a month until age 65.
Until now, their pension would be 1,500 × 180 / 210 = 1,285 euros a month.
With this reform, their pension will be [(1,500 × 180) + (1,000 × 120)] / 350 = 1,114 euros a month.
Consequences: Everyone will have to do their own math. A few people could benefit from the reform, for example someone who contributed a lot between 40 and 50 and then lost their job. Most people, though, will lose out, because almost everyone earns more at 65 than at 40.
Example under the current rules: if the retiree in our example had contributed for 35 years, they received the 1,285 euros we mentioned. With 34 years of contributions they received 1,285 × 0.98 = 1,259. And if they had only started contributing at 40 (25 years before retiring), they received 1,285 × 0.8 = 1,028.
After the reform: The new rule will raise the minimum to 37 years. Even someone who retires at 67 will need to have worked at least two years more than current pensioners to receive the maximum that corresponds to their contribution base.
Who does this reform affect?
Current pensioners have nothing to fear. Their pension is secure. The reform will start to take effect in 2013, and it will be phased in gradually.
Who will be hit hardest is still to be seen, but if we put the pension reform together with the situation of young university graduates described above, it’s clear it won’t benefit them at all, mainly because of the high unemployment rate among young people, which, if memory serves, is around 40%.
Poor job prospects, a late start and a pension reform that won’t let you go home until you’ve met the minimum contribution period.
And if that’s frightening, it’s even more frightening that there are still no calculations confirming that the Spanish pension system will be sustainable over time. Given the direction the anti-crisis measures are taking, if we’re capable of cutting healthcare and education, we’re perfectly capable of cutting our pensioners’ benefits.
That’s why, to avoid an unpleasant situation in the future, there are several possible ways out:
- Don’t depend on a company to hire you, especially one that plans to pay you, with your degree, the same as the errand boy, with the difference that the errand boy has a permanent contract.
- Start your own business: Until now, there was a fear in Spain that someone paying into the general Social Security scheme usually ended up with a bigger retirement pension than a self-employed business owner. Today the scales could be more balanced, since the answer to your quality of life as a pensioner may well be a private pension plan.
- Learn about finance: It’s inexplicable that people turn to private pension plans. I imagine it comes down to a lack of financial knowledge. Anyone who has been paying into a pension plan for 10 years has lost money. It doesn’t matter which plan you have: it’s absolutely certain that its return has been well below inflation. In other words, you’d have done just as well keeping your savings in a safe or under the mattress.
Inspired by: Un poco de calma
Sources: Tu abogado defensor and Libertad Digital
Featured image: Juan Mayordomo, CC BY-SA 4.0, via Wikimedia Commons.
