What is the Toledo Pact?

We will explain how this agreement has affected the Spanish pension system.
In Spain, the pension system is one of the fundamental pillars of the social protection and welfare model. Over the years, political authorities have tried to take on the challenges that could jeopardize the sustainability of this framework, modifying legislation and implementing measures to guarantee its proper functioning. In 1995, in light of the challenge of an aging population and the major economic crisis, the Toledo Pact was set up. The goal of this parliamentary committee was to analyze the state of pensions and propose measures for improving the system. In this article, we explain the Toledo Pact and how it has impacted the present and future of pensions.
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The beginnings of the Toledo Pact

In 1995, in view of the instability faced by the pension system, the parties in the Spanish parliament sealed an agreement that brought in the Toledo Pact. That same year, the Pact Committee published a document analyzing the evolution and status of pensions and establishing a set of recommendations designed to guarantee their future sustainability. In addition to laying the foundations for future legislation and reforms in the pension field, these 15 initial recommendations led to a series of significant changes in the system.

On the one hand, the document established the differences between contributory pensions (funded by the worker's contributions) and non-contributory pensions (funded by the General State Budgets). Similarly, the retirement age was maintained at 65 years. Nevertheless, it was recommended that workers voluntary prolong their working life and that the purchasing power of pensions remain stable by revaluing them according to the consumer price index (CPI).

A year later, the Government and the main trade unions came to an agreement that resulted in the Law on Consolidation and Rationalization of the Social Security System. This new regulation increased the number of years used to calculate pensions (from 8 to 15) and propelled the creation of the Social Security Reserve Fund, which was established in 2000 with the aim of accumulating resources to counterbalance economic weakness.

Subsequent reforms

In the years following its implementation, the Toledo Pact parliamentary committee held regular meetings with the aim of updating information on the state of pensions and proposing new measures to meet current challenges.

In 2001, with the support of employers and trade unions, the Government pushed forward legislation that encouraged retirement beyond 65 years and allowed for early retirement starting at 61. Two years later, the parliamentary committee published a new document that, in addition to extending the number of recommendations from 15 to 22, prompted the adoption of a new regulation in 2007 that modified the number of effective contribution days used to calculate pensions and increased the partial retirement age to 61 years.

Among the reforms brought in by the Toledo Pact, one of the most significant in terms of the future of current workers is the Regulation regarding the progressive delay of retirement age, which was approved in 2011 by Law 27/2011 and will culminate in 2027: thus, in accordance with the provisions of this standard, the retirement age will be set at 67; those who have contributed at least 38 years and 6 months may retire at 65. In addition, the new legislation also increases the contribution period required to receive the maximum pension (from 35 to 37 years) and the number of years on which the pension is calculated, which will go from 15 to 25, starting in 2022.

Finally, in 2013, the pension revaluation index (IRP) was approved, which decouples pensions from the CPI — although this parameter was set aside in 2018 and 2019 —, and a sustainability factor was introduced that is expected to come into force in 2023.

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The future of the Toledo Pact

The Toledo Pact parliamentary committee has recently met again in order to find solutions to one of today's most pressing problems: the imminent exhaustion of the Social Security Reserve Fund. In this case, the aim is to try to find alternative financing methods that promote the stability of the system. Although an agreement has not yet been reached, some of the proposals include the establishment of specific taxes or the use of an existing tax item.

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