What is a contributory pension?

Find out about the keys to these kinds of pensions and the Social Security Reserve Fund.
The Social Security Institute guarantees coverage of various contingencies such as retirement, disability, or widowhood through the contributory pension system. Anyone who meets the legal requirements will be eligible for contributory pensions. In order to ensure payment of pensions during a social Security deficit, the Social Security Reserve Fund, or pension piggy bank, was created. Read on to find out what contributory pensions are and how the pension piggy bank works.
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Contributory pensions

Contributory pensions are financial benefits with an indefinite duration, usually for life, and whereby the recipient has to meet a series of requirements and must have had a prior legal relationship with the Social Security Institute — e.g. must have been registered in the system and have made contributions for a minimum period. The amount to be received depends on the contributions made by the worker during the required period. These differ from non-contributory pensions in that the latter are not based on whether or not you have paid Social Security contributions, and they are managed differently. The State is responsible for contributory pensions, while the competent bodies of the Autonomous Communities are responsible for non-contributory pensions.

Within the contributory pension scheme are the following modalities, each with its different modalities: retirement pensions, permanent disability and death and survivorship pensions (widowhood, orphanhood and family member pension). The main objective is to cover the financial needs of each person in each of these possible situations.

Retirement pensions aim to cover the loss of salary when a working person ends his or her working life. There are a wide variety of types of retirement pensions, although the most frequent are ordinary retirement, involuntary early retirement, and voluntary early retirement.

A permanent disability pension covers the loss of salary incurred by a person who suffers a disability, whether due to illness or accident, after which his or her working capacity becomes null or is reduced. Different degrees can be granted: partial permanent disability, full permanent disability, absolute permanent disability or severe disability.

Lastly death pensions are given to compensate for the financial need that can result from the death of others. The modalities are widowhood, orphanhood, and for relatives.

The pension piggy bank

The Social Security Reserve Fund is known colloquially as the pension piggy bank. It is a sovereign investment fund that is financed by the surpluses of the Social Security system and, where applicable, by the Government's budgetary allocations. This means that, at a time when Social Security income exceeds expenditure, the savings is used to create a fund that guarantees contributory pensions during a deficit. This way, savings are made during good economic cycles in order to soften the possible impact of poor economic cycles, such as a crisis, and thus guarantee the payment of contributory pensions.

The fund is mainly composed of Spanish Public Debt securities. The returns on these assets also contribute to increasing the balance of this piggy bank. In essence, not only is money deposited in the Fund, but it is invested to maximize returns and, therefore, increase its balance.

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The pension piggy bank was created in 1997 as an emergency mechanism in the event that Social Security revenue was not sufficient to cover contributory pension expenses. The fund received its first contribution in 2000 and reached a peak in 2011 with almost 67 billion euros. Beginning in 2012, as a result of the economic crisis, the Spanish Government began to withdraw large amounts of money from this fund, which currently sits at the lowest levels of the last 15 years, closing 2018 with just over 5 billion euros.

Now that you are familiar with contributory pensions and the pension piggy bank, you can calculate the amount of your pension in order to prepare for the future. You can access our online simulator on our bbva.es page. We help you calculate your contributions and advise you which savings and investment products can help you to maintain your current purchasing power.

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