On August 1 2011 the Law on Updating, Adapting and Modernising the Social Security System (27/2011) was issued.
The overhaul is a response to several sociological and economic factors that have necessitated action to preserve future pensions, including:

  • the prolonged decline in birth rates and the simultaneous increase in life expectancy;
  • the need to reconcile more appropriately the social security contributions made during people's working lives with the contributory benefits to be received upon retirement;
  • the progressive decrease in length of service, as training and early retirement have become more prevant; and
  • the ongoing economic turmoil.

On January 25 2011 the Congress of Deputies approved the Evaluation Report and Reform of the Toledo Agreement. On February 2, within the context of social dialogue, employer and employee representatives signed a new social and economic agreement with the government, in order to promote growth and employment, and guarantee pensions. The purpose of Law 27/2011 is to ensure that the pledges made in this agreement are reflected in the social security system. The law also incorporates nine of the recommendations put forward in the amendment to the Toledo Agreement.

Article 4 of the law revises the legal pension system. The age of retirement is now 67, although anyone who has paid social security contributions for 38 years and six months is still entitled to retire at 65. This will be implemented progressively and gradually over a 15-year period whereby, for anyone who is 35 years and three months old in 2013, the contribution period of 38 years and six months will be enforced in the 2027 financial year.

The pension calculation system has also been revised. The period now stands at 25 years, which will be enforced gradually up to 2022. Exceptions apply for older workers who have been prematurely forced out of the labour market, and self-employed workers are included up to 2017.

The precise timeframe for full compliance with the pension assessment basis has also been modified. The new percentages shall apply from January 1 2027. A gradual transitional period has been established until that date.

Article 5 aims to restrict early retirement to cases where it can be proved that social security contributions have been made for at least 30 years. In this way, early retirement cannot be used as a labour force adjustment tool.

Article 6 concerns partial retirement and the corresponding modifications are incorporated into this provision. Persons who have reached the legal retirement age (ie, between 65 and 67 years old) are still entitled to avail of partial retirement without simultaneously having to sign a relief contract. Where such a contract must be signed simultaneously, the law establishes that there must be some correlation between the contribution assessment basis for the relief worker and that of the semi-retired employee, so that the relief worker is entitled to no less than 65% of what the semi-retired employee earns.

Article 8 introduces the so-called 'sustainability factor' to the social security system, whereby from 2027 onwards, the main parameters of the system shall be reviewed in light of the differences between how the population's life expectancy at 67 years old has evolved in the year of review and life expectancy at 67 years old in 2027. Such reviews shall be carried out every five years.

Law 27/2011 further authorises the government, by means of royal decree, to establish a Social Security Administration State Agency, whose task - on behalf of and as representative of the state - will be to administer and effectively enforce the social security system and carry out other duties that it is assigned, including those concerning the affiliation, contribution collection, payment and administration of cash benefits (although not those concerning unemployment benefits).

For further information on this topic please contact Ricardo Pradas Montilla at Pradas y Cebrián Asociados by telephone (+34 9170 103 90) or email ([email protected]).