Governments of several European countries, including Spain, are reforming their Social Security contribution systems in an attempt to address pressure that will increase over the coming decades. The aging population is forcing economies to seek new ways to guarantee the financing of pensions and public social protection services. The latest OECD report, which groups the 38 most developed countries in the world, on fiscal policy reforms, published this Tuesday, shows an uneven evolution between income taxes and social contributions. While the former have followed different trends depending on the country and, in some cases, have been reduced for certain income levels, contributions have steadily increased over the last four years. During this period, governments have raised both the rates and the bases on which they are calculated.
Spain is part of this trend. In recent years, the cost of contributions associated with payrolls has increased as a result of the rise in contributions to the Intergenerational Equity Mechanism. The measure began to be applied in January 2023 and aims to bolster the Social Security funds in light of the increased expenditure that the retirement of the baby boom generation (those born between 1950 and 1970) will entail. The surcharge affects both salaried workers and the self-employed, who bear it through an increase in their monthly fee. In the case of employees, it appears directly among the payroll deductions.
Since its implementation, the surcharge has gradually increased and will continue to do so over the coming years. The idea is for the rate to reach 1.2% in 2029. Of that percentage, 1% will be borne by companies and the rest by employees. That is, a part, even if small, is contributed by the worker through their payroll.
The Government has also raised the maximum contribution base to Social Security, aiming to align it with the evolution of real wages. The limit on which contributions are calculated grows each year by 1.2 percentage points above inflation. As the limit rises (which will continue to increase gradually until 2050), workers with higher salaries contribute a larger portion of their annual gross income, reducing the bracket that until now was exempt from contributions. Complementarily, the so-called solidarity quota has been introduced, which progressively taxes the part of the remuneration that exceeds the maximum base.
The reform of the contribution system is not exclusive to Spain. The OECD report shows that other European countries have adopted similar measures to strengthen the financing of their pension and healthcare systems. In fact, the organization explicitly states that “Social Security contribution reforms showed a sustained trend towards expanding the bases and increasing rates, likely in response to longer-term demographic pressures and the financing needs of social protection systems.”
France, for example, has raised the contribution of companies to the pensions of public administration territorial officials by three percentage points. Greece, for its part, has increased the income limit subject to social contributions by 2.5%, placing it above 7,760 euros per month, a modification that also impacts the contributions of self-employed workers.
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Other countries have opted to eliminate exceptions that reduced contributions from certain groups. In Belgium, professional athletes have ceased to benefit from the limit that reduced Social Security contributions on the highest salaries. In Lithuania, the self-employed now face a higher burden after a reform that raises from 50% to 90% of their income the amount considered to calculate their contributions. At the same time, a limit has been set for company contributions, which cannot exceed the equivalent of 60 times the country’s average salary.
In Germany, the increase has focused on contributions to mandatory health insurance. The average additional contribution paid by companies and workers has risen to 1.45%. In Slovakia, the health contribution borne by employees has increased by one percentage point, to 5%, and the number of situations in which these contributions must be made has also been expanded. Until now, employees on temporary disability leave were exempt from contributing during that period. That exception has disappeared, allowing the system to have more income through this channel.
The changes indicate that Europe is trying to ensure sufficient income to maintain social protection systems in a future with more retirees and fewer active workers. In this regard, the OECD analysis reveals to what extent countries depend on employment to sustain public finances. In the most developed economies, for example, income tax (IRPF) and social contributions provide, on average, 45% of total tax revenue. That is, any change in the population pyramid impacts the coffers.
In any case, the report warns that it is still too early to determine whether these contribution increases will have a positive impact on employment and the economy, although an increase in revenues is already observed in most of the countries analyzed. The organization also does not evaluate the measures, as it is merely comparative information on fiscal reforms and monitoring the evolution of these policies in member countries.
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