When will the new pension reform take effect
Today a significant reform was approved by the government through royal decree, focusing on pensions. The Council of Ministers met in an extraordinary session to announce the new model, highlighting an Intergenerational Equality Mechanism (MEI) as a central innovation. This MEI is expected to influence how wages are calculated and how retirement provisions are funded in the years ahead.
Pension reform: all the keys
The reform changes how the pension calculation period is determined. The calculation will now consider either the contributions from the last 25 years or the contributions over 29 years, while excluding the two lowest performing years. In practical terms, this results in a calculation span of 27 years when using the longer period.
How much will non-contributory pensions increase in 2023
A notable element of the reform is the Intergenerational Equality Mechanism (MEI). This mechanism is a new tax implemented in the first phase, elevating contributions for common contingencies by 0.6 percent. The burden is shared between employers and workers in proportions similar to existing social contributions: 0.5 percent for the company and 0.1 percent for the employee.
MEI: less tax on your payroll
The MEI aims to preserve balance between generations and strengthen the long-term sustainability of the education system and Social Security. To support this, an additional contribution will be allocated to the Social Insurance Reserve Fund for a decade, covering 2023 through 2032.
News that will brighten your day on the March payroll
The government projects that these measures will raise revenue by about 1.2 percent of GDP, totaling roughly 15 billion euros. Yet the effect of baby boomers entering the system creates a long-term funding gap. Projections indicate total pension expenditures could reach around 15 percent of GDP by 2050.
The reform also includes steps to improve minimum pensions, with the objective that the minimum pension from contributions approaches around 60 percent of the median income. A similar progression is planned for non-contributory pensions, aiming to lift them toward 75 percent of the poverty line for a single-person household by 2027.
Economist Niño Becerra raises a warning about pension reform
Addressing gender inequality within the pension system, the gender gap supplement will be increased by an additional 10 percent for the 2024–2025 period. Improvements were also made to close premium gaps affecting women. To fund these enhancements and prevent cuts, the government coordinated with Brussels to boost revenue, primarily through higher wages. Measures include raising the ceiling on maximum contribution bases to capture income from higher salaries starting next year. Pensions will be reassessed annually in line with inflation, with cumulative increases extending through 2050.