The Intergenerational Equity Mechanism (MEI) is a measure that took effect this year, aimed at addressing a major problem with pensions in Spain. But… what exactly is this measure? Who does it apply to? Is it really a new tax?
Spain, like several other European countries, is facing the problem of an aging population.
The number of older adults is on the rise, while the number of young people is either holding steady or declining. This situation places a heavy burden on the country’s pension system: the number of pensioners is increasing relative to the number of contributors.
What is the Intergenerational Equity Mechanism (IEM)?
The Intergenerational Equity Mechanism (MEI) is being implemented to ensure the necessary funds to sustain the country's pension system. The MEI is intended to replace the Sustainability Factor, repealed by Law 21/2021 on Pension System Reforms.
The fourth final provision of this Act provides for the entry into force of the MEI, which stipulates a 0.6 percentage point increase in the contribution rate for common contingencies. This increase is intended to ensure the necessary funding for the pension system in the long term.
It is expected to remain in effect for 10 years, from 2023 to 2032. The MEI has been successfully implemented in other European countries, such as Sweden and Portugal. So, it is not really a new tax but rather an increase in the contribution rate.
Key Features of the MEI
MEI is characterized by the following features:
- It is a temporary measure. It is scheduled to remain in effect until 2032. According to analyses, this is the period during which Spain will experience the greatest generational shift, as the number of pensioners increases without a corresponding rise in the number of contributors.
- This applies to employers and employees. The increase will be implemented while maintaining the same contribution rates for employees and employers. Of the 0.6 percentage point increase, 0.5 percentage points are covered by the employer and 0.1 percentage points by the employee.
- It is a temporary measure. This temporary nature is linked to its time-limited nature. It is triggered solely by the current state of the pension system and the projections made. After 10 years, an assessment will be conducted to determine whether further measures are necessary.
Key Points About the Intergenerational Equity Mechanism
To better understand the Intergenerational Equity Mechanism, let’s consider the following points:
- Contributions will increase for all workers who are enrolled in the Spanish Social Security system.
- The increase in contributions will apply to all workers who are registered with the country's Social Security system. It is estimated that this amounts to approximately 20 million workers.
- The price rose from 28.3 % to 28.9 % overall.
- The figure for businesses will rise from 23.6 % to 24.1 %:
- The number of workers increased from 4.7 million to 4.8 million.
- This increase amounts to 5 euros for the company for each worker earning the minimum wage. Workers earning the minimum wage will contribute an additional 1 euro toward this increase.
- The new rate will appear on bills starting January 1, 2023, under item 598.
This additional contribution will go to the Social Security Reserve Fund and will be used to mitigate the projected shortfalls in the pension system resulting from our demographic situation.
Who is not eligible for the MEI?
The MEI does not apply to active retirees or to those participating in academic training programs or non-work-related internships. It also does not apply to those who contribute exclusively for occupational risks or to new students at the Ministry of Defense.
As for businesses, they will be able to deduct this increase from their corporate income tax. If you have any questions about the MEI, at CBLeón Abogados we have experts in labor law that can help you.
