The Social Security Reserve Fund is reactivated to finance the system through the contributions of part of the contributions of workers and the self-employed between 2023 and 2032 through the Intergenerational Equity Mechanism.
The Intergenerational Equity Mechanism is a system to guarantee the financing of pensions, distributed in a balances way between generations.
The Social Security Reserve Fund is reactivated to finance the system through the contributions of part of the contributions of workers and the self-employed between 2023 and 2032 by means of the Intergenerational Equity Mechanism.
Intergenerational Equity Mechanism, what is it?
The Intergenerational Equity Mechanism (MEI) is a system that replaces the Sustainability Factor approved in the 2013 pension reform to guarantee the financing of pensions. Unlike the Sustainability Factor, which calculated benefits based on the increase in life expectancy, the MEI will only be activated if necessary and temporarily.
The objective of the new mechanism is to try to distribute the effort of financing pensions in a balanced way between generations. Our system is an intergenerational distribution model, in which working people jointly and severally finance the pensions of retirees through their contributions. These pensions are strained by the aging of the population, since today there are only 2.3 contributors per pensioner, when four decades ago the ratio was 5.3, and in another four decades there will barely be one, according to INE population projections. This means that the current financing model is not sustainable over time, even more so with the increase in longevity, the arrival of the largest generation, the baby boom generation, at retirement and the low birth rate.
How does the Intergenerational Equity Mechanism work?
The agreement establishes two components:
1- Reactivation of the Social Security Reserve Fund to finance the system through workers’ contributions between 2023 and 2032. This contribution for workers will be 0.6% of the contribution for common contingencies, divided between the company (0.5%) and the worker (0.1%). For the self-employed, it will be directly 0.6% of the contribution.
This item will serve as a cushion in the event that a deviation in pension expenditure is foreseen for 2050. If this scenario occurs, the so-called pension fund, which today only has about 2,000 million, will be activated in 2033. If it is not necessary to use this “safety valve”, the agreement reached states that the Fund will be used to reduce social contributions or improve the amount of pensions.
2- If, after 2033, the European Commission’s ageing reports (Ageing Report) reveal a deviation from the expenditure forecast in 2050, the Fund will be used, with an annual limit of 0.2% of Gross Domestic Product (GDP). If the amount is insufficient, the Government and social agents will submit a proposal to increase the system’s income to the Toledo Pact.
For further information, please contact Labor advisory services.
