Fedea warns of a "worrying" increase in pension spending and proposes a new active retirement to extend working life
The aging of the population is a significant challenge that Spanish public finances will face in the coming decades. Within less than 30 years, the number of Spaniards of retirement age will increase from 9.7 to 16 million, leading to an increase in spending on public benefits. Researchers from the Foundation for Applied Economics Studies (Fedea) have expressed concerns about the latest pension system reforms, stating that they have led to a significant increase in spending without a corresponding increase in income.
To address this issue, the pension reform introduces new measures to capture income. These measures include a staggered increase in contributions for all workers, capping the maximum contribution bases, and implementing a contribution surcharge for the highest salaries. These measures aim to compensate for the increased spending resulting from the demographic trend and protect the purchasing power of pensioners.
The reform also includes a new incentive system to promote active retirement, allowing individuals to work and collect a pension simultaneously once they reach retirement age. However, researchers at Fedea believe that there is room for improvement in this area and that the measures implemented by the government have not represented a significant change compared to previous legislation.
To address these challenges, Fedea researchers propose a new active retirement model that unifies the three existing modalities, making it fully compatible for individuals to work and collect a pension. The proposal aims to incentivize workers to stay connected to the labor market after reaching the legal retirement age, thereby mitigating the increase in pension spending and reinforcing income. This transition to retirement would be gradual, profession-specific, and flexible, allowing workers to decide if they want to continue working and how they combine their pension with their working hours.
In line with this proposal, Fedea suggests that employees who choose to continue working at retirement age should contribute on the same scale as other Spaniards. Currently, when individuals enter active or delayed retirement, their contributions either stop or are drastically reduced. Fedea’s proposal would recalculate the pensions of those who extend their working life, reinforcing the incentive to receive a higher pension if the years spent working are extended.
One of the challenges facing the implementation of Fedea’s plan is the reluctance of companies to prolong the working life of their employees who have met the requirements for a full pension. To overcome this obstacle, Fedea suggests creating a new type of contract that does not generate severance pay costs. This contract would allow individuals to maintain employment, either full-time or with reduced hours, in the same company or another, without salary limits. The absence of severance pay would be justified by the fact that the employee already has the certainty of receiving their pension if they become unemployed.