In 2023, one of the great innovations for the management of Social Security will come into force: the Intergenerational Equity Mechanism (IEM). This is a key concept for understanding how society addresses the challenges of inequality between generations. In this article, we will explore the concept of the Intergenerational Equity Mechanism, examining its development and what implications it has for younger generations. Read on!
What is the Intergenerational Equity Mechanism?
The Intergenerational Equity Mechanism (IEM) is a mechanism for adjusting the system to ensure its sustainability and equity with respect to future generations. It has been implemented in neighboring countries such as France, Sweden or Portugal.
This idea has recently been developed as a way to address inequality in the distribution of resources, access to education and health, and social justice in general.
The Intergenerational Equity Mechanism is a spending adjustment tool. It ensures that future generations are not penalized by the costs of their ancestors’ decisions.
This would be achieved by increasing spending or reducing revenues from payroll and Social Security, depending on the resources available and how much they need to be increased or reduced.
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How will MEI work in Spain?
The Intergenerational Equity Mechanism (MEI) is a tax introduced by the Spanish government to finance retirement pensions in the coming years.
It was conceived as part of the design of the pension system from its inception as a way to respond to the growing demographic challenge facing Spain.
As can be seen in the image above, this new quotation consists of two complementary procedures:
The first, the process of endowing the Reserve Fund with capital. It is based on an increase in Social Security contributions and pensions in the period 2023-2032 with the Intergenerational Equity Mechanism. This reserve fund will be used to compensate for future spending increases caused by the demographic challenge.
The second process is based on a reduction of pension expenditure growth after 2032. This through measures such as increasing the retirement age or reducing replacement rates.
How will the Intergenerational Equity Mechanism affect payrolls?
The forecast of this new tax is that the Reserve Fund could receive approximately 2,000 to 3,000 euros per year. The latter would function as a pension piggy bank to be used in case of need.
Therefore, the Intergenerational Equity Mechanism, which became effective on January 1, 2023, will affect payrolls as follows:
Which contributors will be affected?
Absolutely no one is exempt from the new tax; all employees, regardless of their salary, will be subject to it. Both salaried employees and the self-employed will see this tax reflected in their paychecks.
Everyone will be entitled to the same percentage discount: 0.6% of salary will go to MEI. The amount deducted from each person’s salary will depend on how much he or she earns. Of this percentage, the employer will be responsible for 0.5% and the employee will have to cover the remaining 0.1%.
Especially for the self-employed, the Intergenerational Equity Mechanism will see the contribution rate for common contingencies increase by 0.6 percent.
This translates into 5 euros more per month in your Social Security contribution. It should be borne in mind that next year the new contribution system for the self-employed will come into force, so your contribution could go up or down depending on your actual net income.
The government believes that the Intergenerational Equity Mechanism will be essential for pensions expected to occur between 2030 and 2040, when most baby boomers retire. After that time, the tax could cease to be mandatory.
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What will be the effective period?
The Intergenerational Equity Mechanism is the inaugural tax structure established in our nation to fund retirement plans. Never before has a tax been implemented to pay for pensions.
It is distinguished because the funds cannot be allocated to any other intention. It has replaced the Sustainability Factor that was established in 2013 when the Popular Party was governing. It has now been declared to remain in force for the next decade, up to and including 2032.
A contribution to the Reserve Fund of between €2 billion and €3 billion is planned for each year from 2023.
What will happen after 2033?
The Intergenerational Equity Mechanism proposes a scenario after applying this contribution over a 10-year period.
To be precise, if from 2033 onwards, the European Commission’s Ageing Reports show a divergence in the estimate of pension expenditure in 2050 with respect to the 2024 report (which will be taken as a guide), this fund will be used, with an annual ceiling of 0.2% of Gross Domestic Product (GDP).
If this were not sufficient, the government would enter into negotiations with the social partners to bring it before the Toledo Pact.
The objective will be to arrive at a balanced proposal aimed at decreasing the percentage of pension spending relative to GDP or increasing the contribution rate or other alternative solutions to increase revenues, according to the Ministry’s statement.
Characteristics of the Intergenerational Equity Mechanism
The Intergenerational Equity Mechanism has some main features for its implementation in the second part of the Pension Reform. These are:
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