A welcome change in the pension contribution system means part-time workers will no longer have to spend longer in employment to qualify for an earnings-based retirement fund – a move that is expected to affect around 1.6 million people who, at present, are not in full-time jobs.
Full details will be released on Wednesday this week in the daily State Official Bulletin (BOE), a hefty publication containing government announcements, but the basic outline of the reform has been explained in national media pending the finer points.
How were part-timers affected until now?
Salaries are, of course, lower for those who work fewer hours, meaning a correspondingly lower pension, and this will not change. To obtain a State pension at all, a worker needs to be paying ‘into the system’ for 15 years, but this is based upon a full-time, 40-hour-a-week job. Those working fewer hours would have to cram in more years – for example, an employee working 20 hours a week would need to be paying a stamp for 30 years to get a pension.
This changed in 2014, meaning 15 years was the minimum required however many hours were worked.
To get a full pension based upon earnings, as at 2018, a worker has to pay ‘into the system’ for 36 years and six months and would retire at age 65 years and six months, whichever came later.
A part-timer or full-timer who had worked for 15 years would be treated the same way in pension terms from 2014 until now, meaning once they passed this 15-year deadline, their earnings would be taken into account in calculating their pensions – but for part-timers, this continued to be on a pro-rata basis linked to their hours.
Effectively, instead of having to work another 21-and-a-half years to access a full contributory pension, a person working, for example, 20 hours a week would have to continue in employment for a full 43 years or, as is more likely to be the case, would retire at the usual State pension age but on less money.
Added to the fact that the lower wages involved in part-time work would decrease a contributory pension anyway, the number of years being taken on a pro-rata basis meant a double blow to part-timers’ pockets when they retired.
This has now been changed, and the number of years worked is the same for all employees, irrespective of how many hours a week they spend on the job.
Why do some workers pay into the system longer with no extra benefits?
A petition on Change.org is calling for the contribution system to change since many Spaniards who started work at a young age are still having to wait until they are 65-and-a-half before they can retire on a full pension, even if they have paid into the system for 40 or nearly 50 years.
The current system also means those who have not managed to pack 36-and-a-half years’ pension contributions into their working lives before they reach 65-and-a-half will have to keep on in employment until they do or retire on a lower pension.
Historically, there has been little danger of this happening to anyone as long as they started work by the age of 29, but the financial crisis which started in 2008 and continued for many years, plus its aftermath, and the ongoing problem of largely-seasonal work in touristy areas of Spain, have meant many residents spending long periods – often years – unemployed, with their stamps not being paid.
Whether the system changes as the affected generation nears retirement age remains to be seen.
If my pension isn’t enough, can I carry on working?
A worker does not have to retire at State pension age, but once in receipt of a State pension, he or she is not allowed to carry out paid work.
Receipt of a pension is in place of a salary, and working whilst earning it is considered ‘Social Security fraud’.
Campaigns by artists and writers have led to a recent change which means royalties received after retirement are now compatible with a State pension, since otherwise, the tiny amounts some were earning from having published a couple of books were preventing them from legally receiving their pensions, or facing huge fines if they continued to earn both.
Workers nearing retirement age can sometimes apply for a ‘halfway-house’ system, whereby they reduce their hours and salary accordingly and receive a pro-rata pension for the hours they do not work.
Also, some large companies which need to make mass redundancies try, where they can, to target those reaching pension age and offer them an early-retirement package, thus softening the blow for everyone and keeping jobs safe for those who still need to work for many more years.
What do you get after 15 years of contributions?
At present, after just 15 years’ employment, workers are automatically entitled to the minimum pension – currently, €9,483.60 a year, paid in 14 monthly instalments since a double payment is made in August and at Christmas, giving the recipient €677.40 a month. For those with a dependent spouse, the minimum pension goes up to €11,701.20 a year in 14 payments or €835.80 a month.
Married pensioners whose spouse is not a dependant receive €9,000.60 a year, or €642.90 a month.
Once past the 15-year minimum, pensions are based on earnings and the average varies by region, typically from about €900 to €1,300 a month.
For this reason, until recently, saving for a private pension has rarely been part of the financial culture in Spain and the maximum contributions to these per year were very small – typically less than the average annual salary, which would preclude anyone on a very high wage or who inherited property before retirement from making a large down-payment into their pot.
The financial crisis and insecurity in the job market changed all that, and working-aged residents are now being encouraged to top up their State funds with a private pension.
Why has it changed for part-timers?
A female part-time worker applied to the regional court of Castilla y León to determine whether her pension, reduced because of the number of years worked applied on a pro-rata basis in line with her fewer hours, was fair – she believed it could be a case of gender discrimination, since currently, 70% of part-time workers are female and the number has, historically, been higher when, in past decades, women were automatically considered to be solely responsible for child-rearing and caring for elderly, sick or disabled family members.
The judge in Castilla y León applied to the European Court of Justice (ECJ), which ruled that the pro-rata pension system in Spain was, indeed, discrimination against women.
Spain’s ministry of work, migration and Social Security had already been considering reviewing this calculation system by then – led by Magdalena Valerio since June 2018, the department has been looking at an overhaul of pensions, labour law, contributions for the self-employed and other issues it considers to be long overdue, and agreed to an automatic State pension rise of 1.6% for 2019, rising to 3% for those on the minimum pension.
Who do the changes affect?
Existing pensioners will not benefit from this new rule – it will be the next generation of pensioners and those which follow and who are currently, or have been, in jobs of fewer than 40 hours a week.
The ministry says it does not have concrete figures for how many residents in Spain work part-time and how many will be affected by the changes, but one of the country’s largest unions, the Labourers’ Commissions (CCOO), says 2.6 million residents are in part-time jobs, of whom 1.6 million will benefit from the new system.
The other million or so will not because their earnings are so low that even on a contribution-based State pension, they would not build up a pot that pays them more than the minimum in any case.
When do the changes come into effect?
Although the publication in the BOE normally means the law is immediately effective, in this case, major overhauls are needed to IT systems first, to ensure they automatically calculate workers’ pensions properly. The government also needs to figure out exactly who should benefit, to make sure it is fair for everyone and that the issue of ‘discrimination against’ is completely avoided.
Magdalena Valerio says the government is ‘working right now on studying timeframes for application’ and ‘analysing the necessary changes’ and ‘other required measures’ to ensure it ‘complies with the ECJ verdict’.
It is expected to be in force before the end of the year.
How do I know what my pension might be?
If you have worked for more than 15 years in Spain – continuous or otherwise – you can get a pension forecast from the Social Security website.
To do so, you will need a ‘digital signature’, which is applied for via your town hall.
Most workers use a gestor, or financial and legal advisor, if only for their once-a-year tax returns – self-employed workers normally use them for quarterly IVA (VAT) returns and income tax calculations, too – and, in the latter case, the gestor will probably already have applied for a digital signature on your behalf to manage your affairs.
Using this digital signature, your gestor can access the Social Security website and inform you of your pension contributions to date, to help you decide whether, and how, to save up for a private fund on top.