The sustainability factor, key to securing the future of Spain’s pension system
December 26, 2013 saw the publication of Law 23/2013 regulating the “Sustainability Factor, previously introduced by Law 27/2011 of August 1, 2011 on Updating, Adapting and Modernizing the Social Security.
A new measure has been set in place under this “instrument” in a bid to strike an automatic balance and align pensions with trends in life expectancy.
It is an open secret that the Spanish pension system is currently facing major challenges. The financial crisis has played havoc with the social security system, bringing both a high jobless rate and a drop in salaries in its wake. The biggest risk facing the system, however, is the country’s ageing population. Current trends in Europe in general and Spain in particular have escaped no one’s notice. The gradual rise in life expectancy and the plummeting birth rate pose major challenges to pension systems such as the one in Spain, based on redistribution and with a markedly social character. The demographic trends have a direct bearing on the dependency ratio, i.e., the number of those receiving pensions per person in employment and calls for the adoption of measures to ensure medium and long-term sustainability.
With this in mind, by implementing the Sustainability Factor, as defined in the above law, the goal is to automatically link the amount of retirement pensions under the social security system to changes in pensioners’ life expectancy, thereby adjusting, by applying a particular formula, the amounts received by those who retire on similar conditions at different moments in time.
The Sustainability Factor thus emerges as a key element of Spain’s pensions system and should help ensure decent pensions and the long-term sustainability of the model.
Garrigues Labor and Employment Department