Law 21/2021 ties pensions to inflation and creates the MEI

On 29 December 2021 the Official State Gazette (BOE) published Law 21/2021 of 28 December on guaranteeing the purchasing power of pensions and other measures to strengthen the financial and social sustainability of the public pension system. It comes into force on 1 January 2022. This note focuses on the rules the law sets, not on the size of the January increase.

Revaluation and the equity mechanism

The law amends article 58 of the General Social Security Law. Each January, contributory pensions are revalued by the average of the year-on-year changes in consumer prices over the twelve months before December of the previous year. If that average is negative, the amount of pensions does not change. The law thereby repeals the 2013 revaluation index, which was calculated from the system’s revenue and spending and guaranteed a minimum of 0.25% and a maximum of inflation plus 0.50%. It also provides for a periodic assessment of the effects of revaluation every five years.

It also repeals the sustainability factor of Law 23/2013, an adjustment to the initial retirement pension designed so that the total amount received over a lifetime would be equivalent between people who retire at different times, and replaces it with a new Intergenerational Equity Mechanism (MEI).

The MEI has two components. The first is an additional contribution paid into the Social Security Reserve Fund, exclusively to cover deviations in the level of spending: from 2023 and over ten years, until 2032, of 0.6 percentage points, following the current split between employer and employee. The second component provides for reviews of pension spending every three years from 2032 and, where necessary, additional measures.

For employers and workers, the first component means an additional contribution cost from 2023; since the law sets it for a specific period, it is worth including in labour cost forecasts for the coming years. It is also worth remembering that the law does not set an amount of pension but rules: each January, revaluation will depend on the average inflation of that period and not on a figure decided in advance.

Retiring earlier or later

The law changes the incentives to postpone retirement beyond the ordinary age (article 210). Those who meet the requirements will be able to choose, once only, between an additional 4% for each full year contributed after that age, a lump sum for each full year, or a combination of both, on terms to be set by regulation. In the lump sum, the amount rises by 10% for those who have contributed at least 44 years and 6 months. If no choice is made, the additional percentage applies.

For early retirement, the law sets up to four years’ advance and 33 years of effective contributions when the termination is not attributable to the worker, and up to two years and 35 years of contributions for voluntary early retirement. In both, the reduction coefficients are applied for each month of advance and vary with the years contributed, with bands at 38 years and 6 months, 41 years and 6 months, and 44 years and 6 months.

What to review

Anyone planning their own retirement, or that of a relative or business partner, should work out from their working-life record how much the pension changes according to retirement age and years contributed, because the coefficients now depend on the month of advance and on the contribution bands, and because the options for postponed retirement give different results. For your own situation, ask your adviser.

The law does not set a figure: it sets rules, and it is the rules that are worth understanding.