Estudios sobre la Economía Española - 2018/12 Trends in Employment and Social Security Incentives in the Spanish Pension System: 1980-2016

Pilar Garcia-Gómez

(Erasmus University)

Sílvia García-Mandicó

(Erasmus University)

Sergi Jiménez-Martín

(Universitat Pompeu Fabra, Barcelona GSE and FEDEA)

Judit Vall-Castelló

(University of Barcelona, IEB and CRES (UPF))

fedea

Las opiniones recogidas en este documento son las de sus autores y no coinciden necesariamente con las de FEDEA.

Pilar García-Gómez^† Sílvia Garcia-Mandicó^‡ Sergi Jiménez-Martín^§

Judit Vall-Castelló^¶

December 10, 2018

Abstract

In this paper, we analyze the association between financial incentives and retirement decisions using aggregate data for over four decades in Spain. We calculate an implicit tax rate on remaining in employment for an additional year and examine its correlation with employment rates for older workers. The results suggest that financial incentives play a role in explaining the retirement patterns of both employed and unemployed workers.

ECO2017-83668-R and helpful comments from the ISS group meeting participants and Alfonso Sánchez.

^†Erasmus University (School of Economics). garciagomez@ese.eur.nl

^‡Erasmus University (School of Economics). garciamandico@ese.eur.nl

^§Universitat Pompeu Fabra (Department of Economics), Barcelona GSE and FEDEA. sergi.jimenez@upf.edu

^¶University of Barcelona (Department of Economics), IEB and CRES (UPF). judit.vall@ub.edu

1 Introduction

Labor force participation rates at older ages have been on the rise since the mid-1990s in many OECD countries. In Spain, participation rates of men aged fifty-five to sixty-four have increased by almost ten percentage points over the last decades, while participation rates of women have more than doubled (see Panel A of Figure 1). Existing descriptive evidence points out to the potential role of changes in the skill composition of workers, favorable economic conditions until the Great Recession or the efect of wife’s labor market participation on the probabilities that men retire later (See Coile (2018); García-Gómez et al. (2018)).

Panel B in Figure 1 shows the employment rate over time for men and women aged fiftyfive to fifty-nine, sixty to sixty-four, and sixty-five to sixty-nine. For men, employment was decreasing for all age groups until the mid-1990s. At the end of the 1990s, the employment rate began to rise, until the financial crisis hit in 2008. The resulting drop in employment, however, did not translate into lower labor force participation (see A.1 in Panel A of Figure 1). From 2015 onwards, we observe again an increasing trend in employment, coinciding with the recovery of the Spanish economy. Both employment and labor force participation of men aged sixty-five to sixty-nine remained relatively constant at low levels over the entire period. The picture for women aged fifty-five to sixty-four is distinctively diferent. Women experienced flat employment and labor participation trends until the late nineties when their employment rate soared (see A.2 and B.2 in Figure 1). These increasing trends continued even during the period of economic recession from 2008 to 2013. As for men, employment and participation rates of women aged sixty-five to sixty-nine were rather constant at low levels through the entire period. In this paper, we investigate to what extent changes in financial incentives from Social Security (SS) programs can explain these trends.

Changes in the Social Security system, defined as old-age pension system (OA), as well as unemployment (UI) and disability insurance (DI), have the potential to modify the incentives of workers to retire at a given age. The empirical literature exploring the efect of financial incentives on retirement behavior of employed workers is large (Samwick 1998; Gruber and Wise 1999, 2004; B¨orsch-Supan 2000; Belloni and Alessie 2009). The general finding of this literature is that financial incentives do afect retirement decisions, i.e., more generous financial incentives significantly increase the probability of (early-) retirement.

Figure 1: Trends in Employment rates and Labor Force Participation of men and women from 1987 to 2017 A. Labor Force Participation A.1. Men

A.2. Women B. Employment Rates

B.1. Men

B.2. Women

A more recent line of research also investigates the responses of unemployed workers to Social Security financial incentives. Coile and Levine (2007, 2011) use US data to investigate how the Social Security system afects the retirement responses of older unemployed workers. Using French data, Hairault et al. (2010) find that the distance to the statutory retirement age is a key predictor of retirement behavior. Although, in general, the authors find that financial incentives afect retirement behavior, eligibility conditions turn out to be the most important determinant of retirement behavior.

For the Spanish case, the seminal papers by Boldrin et al. (1999, 2004) and Jiménez-Martín and Sánchez-Martín (2004) find that financial incentives have a significant efect on retirement probabilities, although the magnitude is small. More recently, Cairó-Blanco (2010), García-Pérez et al. (2013) and Sánchez-Martin et al. (2014), who explicitly consider the behavior of unemployed workers, also find a significant but weak influence of financial incentives on labor force exit. This paper extends previous work for the Spanish case by analyzing a longer time series (1980-2015), which allows us to cover several reform periods.

We analyze the association between financial incentives and retirement decisions using aggregate data over four decades in Spain. We first compute expected social security benefits from each possible retirement pathway (OA, UI, and DI) at ages fifty-five to sixty-nine for a representative worker for each cohort falling in this age range in our observational period. We allow representative workers to difer by marital status, gender and earnings level. We then move on to calculating the implicit tax rate on employment, a measure that weights the gains and losses from working one additional year for each representative worker. Finally, we test the correlation between the implicit tax rate on employment and the employment rates for older workers using both graphical inspection and regression analysis with data aggregated at the regional level. Our results suggest that financial incentives play a role in explaining the retirement patterns of both Spanish workers. However, they seem to play a lesser important role in consistently explaining changes in overall employment rates among older workers. In other words, while aggregate financial incentives are associated with the aggregate exit rate of older workers, other factors seem to play a more crucial role in explaining aggregate employment trends. This is consistent with the descriptive evidence in García-Gómez et al. (2018).

The rest of the paper is organized as follows. Section 2 describes the reforms of the Spanish Social Security system over the last three decades. Section 3 explains the measurement of the Social Security incentives and the assumptions behind our calculations. Section 4 reports the resulting calculations, and Section 5 analyzes the relationship between the Social Security incentives and employment rates since 1980. Section 6 concludes.

2 Reforms in the Spanish Social Security System

2.1 Changes in the Old-Age Pension System

The Spanish old-age pension system is a defined benefit pay-as-you-go system. There have been several reforms in the system over the last 30 years, which we briefly summarize here (see Table 1 for a summary, and Boldrin et al. (2010) and García-Gómez et al. (2012) for a detailed exposition of the changes in the old-age pension system in Spain). We start describing the system before the 1985 reform. Since this reform, there have been substantial parametric reforms in 1997, 2002, 2007, 2011 and a non-parametric reform in 2013. Figure 2 depicts the timeline of the reforms of the Spanish Social Security System from 1980 until 2015, as well as the main parameters that were modified in each of the reforms.

2.1.1 The system before the 1985 reform

As described in Boldrin et al. (1999) the transition from the old Mutualidades system to a system of Social Security contributions was completed in 1979, with the removal of bases tarifadas (fixed covered wages). The crucial ingredients of the system until 1985 were as follows:¹

• The earliest eligibility age was 60, and statutory eligibility age, 65 if the individual did not have any job that required an afiliation to the social security system.

¹See Boldrin et al. (1999, 2004) for other details regarding disability and survivor pensions.

• A minimum of 10 years of contributions were required to gain access to a contributive pension.

• The pension was calculated on the basis of three elements: (1) the average of the contributions in the 24 months preceding retirement, (2) the penalty for early retirement (8 percent per year anticipated) and (3) the penalty for insuficient contributions (2 percent per year not contributed, full benefit reached with 35 contribution years).

2.1.2 The old-age pension system after the 1985 reform

The key elements of the Spanish pension system prevailing until 2011 were set in 1985. Eligibility for the old-age benefits increased from 10 to at least 15 years of contributions to the system. The pension amount was calculated by multiplying a regulatory base by a percentage which depended on the age of the individual and the number of years contributed to the system. Under the 1985 regime, the regulatory base was obtained by dividing by 112 the wages of the last 96 months (8 years) before retiring and the percentage applied to this regulatory base depended on the number of years of contributions (n) as follows:

\[\left\{ \begin{array}{l} 0, \text { if } n < 1 5 \\ . 5 + 0. 0 3 (n - 1 5), \text { if } 2 5 > n \geq 1 5 \\ . 8 + 0. 0 2 (n - 2 5), \text { if } 3 5 > n \geq 2 5 \\ 1, \text { if } n \geq 3 5 \end{array} \right.\]

The pension amount was capped from below by the minimum pension (see Jiménez-Martín 2014 for details) and the maximum benefit (between 4 and 5 times the minimum wage).

2.1.3 The 1997, 2002, and 2007 reforms

In 1997 the number of contributory years used to compute the benefit base was progressively increased from 8 to 15 years in 2002, and the formula to calculate the replacement rate was made less generous. On the other hand, the 8% penalty applied to early retirees between the ages of sixty and sixty-five was reduced to 7% for individuals with at least 40 years of contributions at the time of early retirement.

In 2002 further changes were introduced. Before 2002, only individuals who had contributed to the system earlier than 1967 could benefit from early retirement at sixty, while the rest had to wait until the statutory eligibility age of sixty-five. In 2002, early retirement at sixty-one was made available for the rest of the population. At the same time, there was an impulse to the partial and flexible retirement with the possibility of combining income from work with old-age benefits and the introduction of incentives for individuals to retire after the statutory eligibility age of 65.² At the same time, the possibility to access retirement was extended to individuals unemployed for reasons beyond their willingness at sixty-one and who have contributed for at least 30 years and have been registered in the employment ofice for the previous 6 months.

In 2007 the incentives to retire later than 65 were further increased providing an additional three percent, instead of the two percent agreed in 2002. The 8% penalty applied to early retirees between the ages of sixty and sixty-five was reduced to 6-7.5%, depending on the number of years contributed, for those individuals with at least 30 years of contributions. In addition, the contributions for unemployed workers older than fifty-two were increased so that they would receive a higher old-age pension when retiring.

²An additional two percent per additional year of contribution beyond the age of 65 for workers with at least 35 years of contributions on top of the 100% applied to the regulatory base

Although these reform tried to increase labor supply of older male workers, the existing evidence (see for example Cairó-Blanco 2010, García-Pérez et al. 2013) does not show any clear link between these reforms and the increased labor supply of older male workers.

2.1.4 The 2011 reform

The discouraging demographic and labor market scenarios prevailing during the first years of the great recession led the Spanish government (forced by the EU pressure to reduce future deficit) to deeply reform the pension system in 2011. Two main elements were targeted: (1) the number of contributive years entering the pension calculation was increased from 15 to 25, and (2) the statutory eligibility age was raised from 65 to 67, gradually. The latter was particularly relevant for Spain, since the statutory eligibility age had not been modified since the year it was first established in 1979. These two changes severely cut the generosity of the pension system (see Sánchez 2017 for a recent evaluation). The reform also restricted the eligibility conditions for early retirement, although the efect of this change on the generosity of the system is less clear. In particular, because the reform barely changed the eligibility conditions to access to the minimum pension, workers expecting to receive the minimum pension (that is workers with low income and short contributive careers) were less afected by the reform (Jiménez-Martín 2014).

2.1.5 The 2013 Reform and the Sustainability Factor

In an attempt to stabilize the short- and long-term financial sustainability of the Social Security system, the Spanish government amended the 2011 reform in 2013. In particular, this amendment introduced a sustainability factor (SF), which consists in linking the initial pension level to the evolution of life expectancy (Conde-Ruiz et al. 2013). This mechanism can be seen as transforming defined benefit schemes to defined contribution schemes.

The SF has two key components, the intergenerational equity factor (IEF) and the pension revaluation index (PRI).The aim of the IEF is to provide equal treatment to those that retire at the same age, with the same employment history, but diferent life expectancies (which are specific to the cohort they belong to). The introduction of this factor didn’t give rise to much controversy, since it was perceived as reasonable that if pensioners were to receive the same total pension throughout their retirement, an individual with a greater life expectancy should receive a little less each year. The second factor, the PRI, fixes a budgetary constraint on the economic cycle and, as such, is relatively flexible in the short term. However, the discretionary rule chosen by the Government guarantees that, even if Social Security revenues are insuficient to cover pension costs, pensions would rise each year by at least 0.25%, and by no more than the annual changed in the CPI + 0.25%.

We expect the 2011/2013 pension reform to incentivize the labor supply of older workers in Spain, by reducing benefit expectations and including incentives to work longer (partial benefit compatibility after the normal retirement age) (Sánchez 2014).

2.1.6 Evolution of Key Parameters

To conclude this section, we show the temporal evolution of the key parameters of the old-age pension system. Panel A in Figure 3 shows the increase in the years of contributions included in the benefit calculation. Reform years are marked with a vertical red line. We see that after the reforms in 1985, 1997 and 2011, the number of years included increased staggeringly. Panel B shows the earliest and statutory eligibility pension ages. The latter has only been increased at the end of the period with the reform of the pension system in 2011. The earliest eligibility at age sixty was initially only available for those that started contributing before January, 1967. In 2002, early-retirement at age sixty-one was introduced for all the other workers. This possibility became restricted in 2011 to situations of involuntary retirement. At the same time, the earliest eligibility age for voluntary retirement was set at sixty-three. Panel C shows the increasing trend in the ratio of minimum benefit to minimum wage, highlighting the generosity of the Spanish pension system. This trend was reverted with the 2013 reform and the introduction of the sustainability factor. Panel D shows the ratio of the minimum to the maximum benefit. Since the early nineties, and in particular after the 1997 and 2002 reforms, the gap between minimum and maximum benefits widens over time. This tendency seems to have been curbed with the 2013 reform.

2.2 Reforms in the Disability and Unemployment system

Another factor that may afect the labor market behavior of older workers are disability and unemployment insurance policies (García-Gómez et al. 2012). In what follows, we summarize the main reforms of both the disability and unemployment systems in Spain.

2.2.1 Disability Insurance

Permanent disability benefits were used extensively as an early retirement mechanism for workers in restructuring industries (such as shipbuilding, steel, mining, etc.) or as substitution for long-term unemployment subsidies in depressed regions during the late 1970 and 1980 (OECD, 2001), which resulted in an increase in the inflows into the disability system

Figure 3: Time Trends of Key Parameters Panel A. Contributive Years in Benefit Calculation

Panel B. Earliest and Statutory Eligibility Age Panel D. Minimum and Maximum Benefits

Panel C. Ratio of Minimum Benefit to Minimum Wage

and permanent disability benefits.

These events prompted a number of reforms introduced during the second half of the 1980s and beginning of the 1990s (see Table 2 for a summary). The main objective of these reforms was to abolish the incentive efects to permanently leave the labor market before reaching the statutory eligibility age for retirement through the disability system. Here we focus on some distinctive features of the main reforms since the creation of the National Institute of Social Security (NISS) in 1979, while we refer the reader to Table 2 for a summary of all the reforms in the disability system in Spain during this period.

The first large disability insurance reform took place in 1997 and included 4 main points:

1. Sickness benefits: stricter control of the sickness status by Social Security physicians, a reduction of the level of long-term sickness benefits, and the replacement of the old job assessment by a more objective definition of the usual occupation of the individual.

2. Permanent disability pensions of individuals aged at least 65 were automatically transferred to the old-age pension system. This was just a change in the classification within the pensions system.

3. Organizational reform: all the issues related to disability insurance were transferred to the NISS. The permanent disability status was in the past assessed and granted by local GPs and this reform created a group of experts (the disability assessment team inside the NISS) which was in charge of assessing applicants ability to work on the basis of the available medical files and a medical assessment from an NISS physician.

4. The claimant did no longer lose entitlement to non-contributory disability benefits if she started working. She would remain entitled to receive non-contributory disability benefits in case of job loss.

In addition to this major reform in 1997, the 1998 budget law introduced the possibility for NISS physicians and mutual insurance companies to review the health situation and status of beneficiaries. Efectively, only very few claimants in the permanent disability system efectively exit the program.

In 2004 and 2005 monitoring of the use of sick leave was tightened with the creation of a new sub-department at the NISS and a new monitoring tool to reduce absence rates. In 2005, a general absence control was put in place for cases in which the absenteeism took longer than six months.

Finally, at the end of 2007 the minimum contributory period to access permanent disability pensions was reduced for young workers in order to adjust for the current later entrance into the job market. At the same time, the formula to calculate the regulatory base of the benefit was slightly modified: the regulatory base of permanent disability due to a common illness is since then decreased by 50% if the individual had not contributed at least 15 years and it is lower the further the individual is from age 65.

All these reforms ensured the financial stability of the disability system in Spain as inflow rates have remained stable, at odds with the dramatic increase experienced by other industrialized countries.³

2.2.2 Unemployment Insurance

In 1984, the government introduced unemployment benefits for workers employed in temporary contracts, and non-contributory unemployment benefits (also called unemployment assistance benefits). In addition, it established a special provision for workers aged over 55 who were allowed to receive unemployment assistance benefits until the claiming age. To receive these benefits, individuals had to satisfy the entitlement requirements of the retirement pension, except for the age. The subsidy paid 75% of the minimum wage until reaching the age to be transferred to the old-age pension system. Furthermore, the years spent unemployed under this special scheme were counted as contributive years towards an old-age benefit.

In 1989 the special provision of unemployment assistance benefits until the statutory eligibility age of 65 for individuals aged at least 55 was extended to individuals aged 52, thus increasing the incentives of older workers to leave the labor market at younger ages.

The reform in 2002 opened up the possibility for individuals aged at least 52, receiving unemployment benefits, to combine the UI payments with earnings. They could receive

³See Jiménez-Martín et al. (2018).

50% of their previous unemployment insurance entitlement, and the employer would pay the remaining amount in wages.

Finally, in 2012 the amount an individual receives from unemployment insurance after the first six months was reduced from 60 to 50 percent of previous earnings.

Table 2: Main reforms since 1980 of the disability insurance and unemployment systems in Spain

3 Measurement of Social Security System Incentives

The Spanish social security System provides diferent incentives to leave the labor market at diferent ages and over time, as detailed in the previous section. In this section, we explain the measures we use and the assumptions we make to capture the impact of social security programs on retirement decisions.

3.1 Definitions and Methodology

The key concept used to assess the impact of social security programs upon retirement decisions is the annual accrual of social security wealth (SSW), which is the present discounted value of lifetime social security benefits. For an individual of type i, where the type is defined by her gender, skill level and marital status, starting to claim benefits from program k at age her social security wealth is defined as:

\[S S W _ {k, t} (R, i) = \sum_ {a = R} ^ {T} B _ {k, t, a} (R, i) \sigma_ {t, a} \beta^ {a - R}\tag{1}\]

Where is the survival probability at age a in year is the maximum length of live, and is the discount factor set at a rate of 3%.

Postponing claiming by one year has two efects on SSW. On the one hand, annual benefits increase with later claiming due to additional contributions and actuarial adjustments. On the other hand, however, benefits are received one year less. We thus define the accrual of SSW as:

\[A C C _ {k, t} (R, i) = S S W _ {k, t + 1} (R + 1, i) - S S W _ {k, t} (R, i)\tag{2}\]

The Social Security System provides incentives to retire when , and to continue working otherwise. That is, when the accrual of SSW is negative, the Social Security system imposes an implicit tax on working longer and claiming later. We define the resulting implicit tax rate as the (negative) ACC divided by the after tax earnings obtained during the additional year of work:

\[I T A X _ {k, t} (R, i) = - \frac {A C C _ {k , t} (R , i)}{Y _ {t + 1 , i}}\tag{3}\]

Finally, we also consider the replacement rate, rr, defined as the ratio of the initial benefit to the last wage, for (planned) retirement at age R:

\[r r _ {(} R, i) _ {k, t, a} = B _ {k, t, a} (R, i) / Y _ {t - 1, i}\tag{4}\]

3.2 Assumptions and Scenarios

In order to compute the SSW, and its corresponding accrual and implicit tax rate, we take the following steps.

We first calculate the previously defined measures for twelve diferent types of individuals: men, women of three diferent earnings levels, and two marital statuses (married and single). We thus evaluate the retirement incentives for low earners males and females, median earners males and females, and high earners males and females. The earnings profiles are based on educational attainment. In particular, low earners are those workers having up to some secondary education, median earners are those having at most completed upper secondary education, and high earners are those having tertiary education. We consider three potential pathways to retirement: old-age, unemployment and disability insurance. Figure 4 shows the share of the population aged fifty-five to sixty-nine that reports being, in any given year, into unemployment, disability or receiving an old-age pension, obtained from the Spanish Labor Force Survey (Encuesta de la Poblacion Activa, EPA).⁴ DI and UI represent about 20% of all transitions to retirement, with an increasing trend in the recent years.

In order to construct the financial incentive measures, we first obtain age-earnings profiles for each of our six types of workers (married and single workers do not difer in their earnings profiles). We define low earners as workers with at most lower secondary education (low skilled), median earners as workers with upper and/or post-secondary education (medium skilled) and high earners are defined as workers with tertiary educations (high skilled).

⁴The EPA is a rotating quarterly survey carried out by the Spanish National Statistical Institute (Instituto Nacional de Estadstica, INE). The planned sample size consists of approximately 150,000 adult individuals. Although the survey has been conducted since 1964, publicly released cross-sectional files are available only from 1977. The 1977 questionnaire was modified in 1987 (when a set of retrospective questions were introduced), in the first quarter of 1992, in 1999 and 2004. The EPA provides fairly detailed information on labor force status, education and family background variables, but it does not include information on earnings. The reference period for most questions is the week before the interview

Figure 4: Pathways to Retirement for men and women from 1975 to 2016 Notes: Data obtained from the shares of males and females in each pathway from the EPA. There was a major change in the survey in 1988, so we cannot obtain a consistent definition of the diferent pathways prior to 1988. We then normalize each share in this time interval to the level in 1988.

We use two diferent age-earnings profiles. First, and given the comparative nature of the whole project, we use a synthetic earnings profile obtained from earnings of the US Current Population Survey (CPS), the German Socio-Economic Panel (GSOEP) and administrative data from the Italian pension system (INPS) for 2016. Using these data, we compute a simple average of the median income, separately for three earnings levels and by gender. We then re-scale this synthetic profile such that earnings at age 50 are one, and multiply them by the Spanish median annual earnings at age 50 reported in the Spanish working histories survey (Muestra Continua de Vidas Laborales, MCVL)⁵ in 2014 for the respective sex and earnings group. We refer to this earnings profile as the common earnings profile, and use it in our main incentive calculations.

Second, we use a time-invariant Spanish earning profile based on the Spanish median earnings by age, gender and earning level in 2014, calculated from the MCVL. We take the median earnings of workers in each category to calculate the earning specific wage profile. We refer to this earnings profile as the Spanish earnings profile.

⁵The MCVL is a random draw of the stock Social Security afiliates (4% of the total), and provides information on employment and unemployment spells of their entire labor history.

For both earnings profiles, i.e., common and Spanish, we deflate/inflate the cross-sectional earning profile obtained (for 2014) to construct the earnings profiles of workers in earlier years (from 1980 to 2013) and in 2015.

Figure 5 shows how the two earning profiles compare for a male and female workers born in 1925, by diferent earning levels. We note that for high earners, the common earnings profile follows quite closely the Spanish time-invariant one. Instead, the common earning profiles of median and low earners are much flatter than what we observe for the one based on Spanish workers.

Figure 5: Common and Spanish Earning (real) Profiles for a worker born in 1925

We construct survival probability curves for each type of worker using average EU-28 survival rates (Eurostat, 2016). The underlying life expectancy at age 15 is 67.8 years for women and 64.7 years for men. We adjust these survival curves for diferences in life expectancy across skill levels. In particular, we generate a life expectancy which is 3 years higher (lower) to reflect the diference in life expectancy across the three earnings categories (Van Baal et al. 2016 and Regidor et al. 2016). ⁶

⁶The measures of financial incentives remain practically unchanged using Spanish survival rates in 2014. Results are available upon request.

All calculated magnitudes are net of Social Security contributions and personal income taxes. Exact calculations of after-tax social security wealth and replacement rates are complicated by the fact that the number of bend points in the Spanish marginal tax schedule is high although decreasing over time (thirty-four in 1985, seventeen in 1995, seven in 2011 and five in 2016). As an approximation, we proceed as follows. We first use the 1995 tax schedule to trace out the relation between the average tax rate (net of standard deductions) and income (net of social security contributions paid by a worker). We then fit by least squares a fourth-order polynomial to this relation. Finally, the estimated coeficients are used to determine after-tax earnings for all previous and subsequent years.

The following sections present the results of the Social Security incentives calculations using the previous definitions and assumptions. We show measures of financial incentives by type of worker, age or cohort and route into retirement. In addition, we also present some aggregate measures using the following weights. First, we aggregate the old age, DI and UI pathways to retirement using as weights the population share that transits in a given year from employment to retirement through each of the three programs, as presented in Figure 4. As we have information on these shares over time and gender, we are able to attribute a particular weight to each gender-age time observation. The second step is to aggregate the retirement incentives over gender, earnings level and age. We obtain population data by age, gender and earnings level over time from Eurostat (Eurostat, 2016). and construct sample averages by gender and earnings level for each age over time. We use these sample averages as the second weight to compute aggregate retirement incentives.

4 Social Security Incentives Over Time

In order to ease the exposition of how the diferent components of the Spanish Social Security system shape financial incentives to retire over time, and facilitate comparison with the evolution in other countries, most of our results are presented for a base-case worker. This worker is a male median earner, born in 1925. In addition, we focus on the incentives of social security for workers retiring through the old-age pension pathway, but we present a comparison of the incentives for workers retiring through the disability or unemployment

pathway in Subsection 4.7.

4.1 The Base Case

Our base case is a male worker of median earnings level born on 1 January 1925, who has been contributing to social security without interruption since he turned twenty, on 1 January 1945. He reaches the earliest eligibility age of sixty in 1985 and the statutory eligibility age of sixty-five in 1990. He is married to a woman who is three year younger than he is and has never worked, and have no dependent children.

Simulations start in year 1980, when our base-case worker turns age fifty-five and completes thirty-five years of contributions, and run for each year until he turns sixty-nine, in the year 1994.

Our basic assumptions are the following. First, if the worker stops working before age sixty, then he chooses to first claim his old age pension benefits at age sixty, the earliest eligibility age, whereas, if he stops working past age sixty, then he starts receiving his old age pension immediately. Second, if he stops working before age sixty, then he receives no benefits or unemployment compensation in the interim years until he starts drawing old-age benefits.

It may be worth summarizing the main qualitative efects of working one more year beyond age sixty in the simulations that we are about to present: (1) It may increase social security benefits by increasing the benefit base, or the replacement rate. The benefit base increases if earnings from the extra year of work exceed average earnings during the last eight years. The replacement rate increases if the worker has contributed for fewer than thirty-five years, in which case an extra year of work buys an extra 2 percent of the benefit base. If the worker has already contributed for thirty-five years, as in the base case, only the efect on the benefit base is relevant. (2) It reduces the penalty for early retirement by 8 percentage points. (3) It reduces by one year the expected period over which the worker will receive a pension. (4) It implies paying additional social security contributions. (5) The marginal tax rate on labor income may turn out to be higher than the marginal tax rate on pension income, owing to the high progressiveness of the Spanish income tax schedule.

Figure 6 depicts the computed replacement rate, social security wealth, accrual of social security wealth and implicit tax rate at each age between fifty-five and sixty-nine for our base case. Social security wealth and its accrual are net of income taxes and presented in e1,000 at 2015 prices.

The replacement rate is zero before reaching sixty, the earliest eligibility age for retirement. It then increases gradually, converging to one and exceeding it slightly by age sixtyfive. SSW starts up at e92,982, remains flat until reaching fifty-eight and increases steadily, peaking at sixty-five with a value of e260,958. This increase is due to a very progressive reduction of the penalty for early retirement (efect 2) and the reduction in one year in the expected period of pension receipt and increase in one year of social security contributions (efects 3 and 4). There are no further gains from claiming after age sixty-five as the base case worker reaches the statutory retirement age in 1990, a year without incentives for late retirement. Thus, from age sixty-five on when additional years of work add nothing to the expected pension amount, efects 3 and 4 dominate and the social security wealth falls. The implicit tax rate on continuing work is negative between the ages fifty-five and sixty, due to the earliest eligibility age for retirement, and becomes positive thereafter. From sixty to sixty-five, the implicit tax rate increases, showing the disincentives generated by the program to work an additional year. From age sixty-five on, the implicit tax rate falls slightly, but remains large and positive.

We compare the previously specified base-case worker born in 1925, to an analogous worker (that is male median earner) born in 1945. The latter will likely face diferent social security incentives, as he would retire under a diferent old-age pension system. For this worker, simulations start in year 2000, when he reaches fifty-five and completes thirty-five years of contributions, and run for each year until he turns sixty-nine, in 2014. Figure 7 shows the comparative incentives calculation for both cohorts of workers, with a solid line for workers born in 1925, and a dashed line for workers born in 1945. In Panel A, we note that the replacement rate at the earliest eligibility age is higher for the younger worker than for the older one. It converges when reaching the statutory eligibility age, and then becomes larger again for the younger worker. The social security wealth follows a similar pattern: workers born in 1945 started at age fifty-five with a social security wealth around e15,000 larger than workers born in 1925. Through the age period, their social security wealth remained larger, until reaching sixty-five, where they converged. The drop in social security wealth upon reaching the statutory eligibility age for retirement was smaller for workers born in 1945, possibly due to the late retirement incentives introduced by the reform in 1997. Panel D shows the implicit tax rate for both cohorts of workers. We note that the incentives to retire at diferent ages faced by workers born in 1945 was quite diferent than the one of workers born in 1925. First, as with workers born in 1925, workers born in 1945 had a negative tax rate on working before age sixty. However, they did not experience the subsidy peak at age fifty-eight that workers born in 1925 did. This is clearly related to the diverging age trends in social security wealth prior to the earliest eligibility age for retirement. Second, younger cohorts experienced a peak tax rate at age sixty, whereas the tax rate was close to zero for older cohorts. This resulted from the heightened generosity of the old-age pension system at age sixty for younger cohorts. Following this peak, the implicit tax rate fell to zero at age sixty-two, before increasing steadily until age sixty-nine.

Figure 6: Incentives Calculation for a Male Median Earner Worker born in 1925 (after-tax values in e1,000 at 2015 prices) Panel A. Replacement Rate

Panel B. Social Security Wealth

Panel C. Accrual of Social Security Wealth

Panel D. Implicit Tax Rate

The comparison of these two cohorts of workers is informative of the significant changes in retirement incentives that the reforms of the old-age system have brought up. In particular, male workers becoming eligible for retirement under the system of 1980 seem to have smaller incentives to retire at the earliest eligibility age than male workers eligible for retirement under the system of 2005. This can be due to two factors. The first one is that the penalization for early retirement became smaller, in particular for workers having already contributed 30 years at the time of first eligibility to retirement. The second one comes from the adjustment of the earning profiles for older cohorts, which are slightly disproportionate, and intercept the maximum contribution base at several points in time, resulting in smaller incentives to retirement for the 1925 cohort prior to the statutory eligibility age.

4.2 Diferences in Social Security Incentives, by Skill Level

In this section we evaluate to what extent workers with diferent skill levels face diferent social security incentives. Figure 8 depicts our calculations for the base-case worker described in the previous section, a married male born in 1925, varying his skill level from medium to low, and from medium to high. In each figure, the dashed darkest line corresponds to low skills, the solid line to medium skills, and the light dashed line to high skills. Panel A shows the replacement rate for each type of workers, and we note that low and mediumskilled workers have identical replacement rates. The replacement rate of high skilled workers follows the same pattern until age sixty, and then remains at a significantly lower level for all subsequent ages. This is possibly due to the fact that earnings for high skilled workers born in 1925 were significantly above the maximum contribution level, implying that they get a capped pension, that replaces only partially their earnings. The social security wealth and resulting implicit tax rate follow a similar pattern across workers, but with diferent levels. High skilled workers experience larger social security wealth at all ages, followed by medium-skilled workers (base case), and then low skilled workers. The incentives to retire before the statutory eligibility age are lower for high earners through the ages analyzed.

Figure 7: Incentives Calculation a Male Median Earner Worker born in 1925 and in 1945 (after-tax values in e1,000 at 2015 prices) Panel A. Replacement Rate

Panel B. Social Security Wealth Panel D. Implicit Tax Rate

Panel C. Accrual of Social Security Wealth

Figure 8: Incentives Calculation for a Male Married Worker Born in 1925 by Skill Level (after-tax values in e1,000 at 2015 prices)

Panel A. Replacement Rate

Panel B. Social Security Wealth

Panel C. Accrual of Social Security Wealth

Panel D. Implicit Tax Rate

4.3 The Efects of Varying the Earnings Profile

In this section, we assess to what extent the measures of social security incentives are sensitive to the earnings profile used. We thus reproduce our simulations using Spanish time-invariant earning profile. Figure 9 compares the resulting incentives using the common earnings profiles (blue) and the Spanish earnings profiles (red). The shape of all the measures across all ages is very close independently of the earnings profiles used. In addition, there are marginally no diferences in the levels for any of the measures of incentives for low and median earners between the synthetic and Spanish specific earnings profiles. The diferences in the level of social security wealth become more notable the higher the earnings level: common earnings profiles seem to overestimate the social security wealth of median and, particularly, high earners before reaching the statutory eligibility age. This results in a slightly lower implicit tax rate when using the common earnings profiles. Overall, these diferences are minimal, and do not afect the trends of our measures. In what follows, we continue using the common earnings profiles.

4.4 Social Security Incentives by Gender and Marital Status

Figure 10 presents a comparison of the calculations for single (in red) and married (in blue) male and female workers.⁷ The main diference between a married and a single worker is the survivor benefit that can potentially be added at each age point. Across genders, the main diference in the incentives simulated comes from the diferences in earnings profiles and survival probabilities. From Panel A, we conclude that replacement rates are very close across gender. We note a small diference regarding the replacement rate of high earning women, which is higher than that of men, most likely because the earnings of women are above the maximum contribution level to a lower extent than those of men. Social security wealth and implicit tax rates were very close across genders, both in shape and levels. The diferences across single and married workers are also quite marginal, consistently across gender. For males, married workers have a slightly higher social security wealth than single workers, across all earning levels. For females, the diference between married and single

⁷We assume that husbands are three years older than wifes for all types.

Figure 9: Incentives Calculation for a Male Married Worker Born in 1925 by Level of Earnings and Earnings Profile (after-tax values in e1,000 at 2015 prices)

Panel A. Replacement Rate

Panel B. Social Security Wealth

Panel C. Accrual of Social Security Wealth

Panel D. Implicit Tax Rate

workers is much smaller, and only became noticeable from age sixty onwards. There are virtually no diferences across marital status in the resulting tax rates for males. For females, the resulting tax rate on working an additional year is slightly larger for married than single workers.

Figure 10: Incentives Calculation for a Male and Female Worker Born in 1925 by Level of Earnings and Marital Status (after-tax values in e1,000 at 2015 prices)

Panel A. Replacement Rate

Panel C. Accrual of Social Security Wealth

Panel B. Social Security Wealth

Panel D. Implicit Tax Rate

4.5 Temporal Variation of Retirement Incentives

The evidence shown in the previous subsections provides an interesting snapshot of the incentives to retire of a worker born in 1925 from his 55th to his 69th birthday. However, it fails to encompass the role of the numerous reforms of the Spanish social security system over the last three decades in shaping the social security incentives. In this subsection, we show how the measures evolve over time and how they relate to policy reforms.

Figure 11 shows the evolution of the replacement rate, social security wealth and its accrual, and the implicit tax rate, for diferent age groups. Panel A shows the calculated replacement rate from 1980 to 2015 for workers aged fifty-six, fifty-eight, sixty, sixty-two, sixty-four and sixty-five. The replacement rate is zero for workers not eligible for retirement. We note from the Figure the change in the penalties for early retirement in 2002, the change in the earliest eligibility age from sixty to sixty-one in 2007 (year at which the first cohort unable to contribute before 1967 turned 60), and from sixty-one to sixty-three in 2013. Besides these changes, replacement rates are quite stable over time.

Figure 11: Time-Varying Incentives Calculation for a Married Male Worker with Median Earnings (after-tax values in e1,000 at 2015 prices)

Panel A. Replacement Rate

Panel B. Social Security Wealth

Panel C. Accrual of Social Security Wealth

Panel D. Implicit Tax Rate

Panel B presents the social security wealth, which has been rather constant over time. We note some discontinuities in the trends that correspond to reform periods of the system. For instance, we note an increase in social security wealth in 1985 for ages fifty-eight to sixty-five, associated to the significant reform in 1985. The principal changes were an increase in the minimum number of years of contributions for pension eligibility (from eight to fifteen), and an increase in the number of years entering the computation of the benefit base. Although this reform was implemented to tighten the generosity of the old-age pension system, we observe the opposite efect on the expected social security wealth from workers. This larger incentive to retire may actually have been generated by the increase in the number of working years entering in the benefit base, together with decreasing earning profiles from ages fortyfive to sixty.

In 2002, we observe a peak in the social security wealth for ages fifty-six to sixty, coinciding with the introduction of the earliest eligibility age at sixty-one for workers that started contributing into the system after 1967. The increase in social security wealth seems to afect only a few cohorts. For instance, for those aged fifty-six, the increase in social security wealth peaks in 2002, and entirely subsides in 2003. Those aged fifty-eight experience this increase for three years, from 2002 to 2004, and those aged sixty for five years. This means that only workers born in 1942-1946 experience an increase in social security wealth.

The latest reform of the pension system in 2011 (introduced in 2013) generated a drop in social security wealth for all claimants younger than sixty-four. This is possibly due to an increase in the earliest eligibility age from sixty-one to sixty-three for workers (there are some exceptions for unemployed workers with long contributive careers).

The implicit tax rate moderately responds to the changes in social security wealth previously described. The trends first changes in 1985 and then in 2002, coinciding with the introduction of the earliest eligibility age at sixty-one for claimants contributing after 1967. The observed changes in the implicit tax rate from 2002 to 2007 are due to diferent cohorts with diferent rules regarding the earliest eligibility age approaching the diferent key ages.

Regarding the level of the implicit tax rate, we note that workers sixty-four or above are incentivized to retire thorough the observed period. Similarly, workers aged sixty-two faced a positive implicit tax rate until 2012; the incentive became zero in 2013 with the increase of the earliest eligibility age from sixty-one to sixty-three. The incentives to retire faced by workers aged sixty change over time. They were incentivized to retire under the system of 1980 and part of that of 1985. In the mid-nineties, the system seemed to subsidize employment, but by the late nineties, it was incentivizing retirement. Last, from 2007 onwards, claimants aged sixty have been incentivized to work, mostly due to the increase in the earliest eligibility age. As expected, workers aged below sixty have always been incentivized to remain employed.

4.6 Average Old-Age Pension System Incentives

Figure 12 summarizes the previous results on the implicit tax rate by aggregating it over workers aged fifty-five to sixty-nine.⁸ The vertical dashed lines signal the reform years, and the notes indicate the main change in the parameters of the old age pension system in each reform. In 1985, following the increase in the minimum required service years for eligibility, we see a large spike in the implicit tax rate. As previously described, this is due to using decreasing income profiles from age forty-five onward. The reduction in the generosity of benefits in 1997 decreased the implicit tax rate, albeit with some delay. The impulse of partial retirement in 2002 had mild efects in curbing the implicit tax rate on work. A bigger drop in the retirement incentives was induced by the increase in the earliest eligibility age in 2007. The latest reform in 2011 and the increase in the statutory eligibility age and the introduction of the sustainability factor in 2013 have surprisingly mild efects on the aggregated measure of retirement incentives.

4.7 Other Pathways to Retirement

In this subsection, we explore two additional pathways to retirement in the Spanish Social Security System, namely through disability and unemployment insurance programs. Figure 13 shows the incentives for our base case worker for each retirement pathway. Panel A shows the replacement rate for the three diferent pathways over ages 55 to 69, for a married male worker with median earnings. First, we notice that the replacement rate is not zero for UI and DI pathways before sixty. For DI, the replacement rate is the fraction of benefits to the wage at the onset of disability, and it is linked to the severity of the disability, but not to age. For the unemployed, the system contemplates the possibility to enter in an early retirement route if losing their job at age fifty-two or later, where a positive replacement rate is ensured. From the age of the early eligibility onwards, the workers in this pathway are automatically moved to the old-age pathway. It is thus not surprising that the old-age and the UI pathways are very close in the social security wealth they provide (Panel B). The DI pathway ensures a rather constant social security wealth to disabled workers. From age sixty onwards, there is a small decline in wealth. Correspondingly, the implicit tax rate for the DI pathway is flatter and always positive.

⁸We use time-varying population weights on the fraction of individuals in each age category (fifty-five to fifty-nine, sixty to sixty-four, and sixty-five to sixty-nine) to compute these averages.

Figure 12: Implicit Tax Rate

Figure 13: Incentives Calculation for a Base Case Worker born in 1925 by Retirement Pathway (after-tax values in e1,000 at 2015 prices)

Panel A. Replacement Rate Panel C. Accrual of Social Security Wealth

Panel B. Social Security Wealth Panel D. Implicit Tax Rate

Our Base Case Worker corresponds to a married male with median earnings, born in 1925.

4.8 Weighted Temporal Variation of Retirement Incentives

We reproduce the figures showing the temporal variation of the retirement incentives in Spain, aggregated over gender, level of earnings and pathway to retirement. As explained in Subsection 3.2, we weight the previously presented results by gender, earnings level and pathway using the time-varying share of population in each pathway and from each gender and earning level. Figure 14 depicts these aggregated financial incentives to retire. In Panel A, we notice that the replacement rate is no longer zero for workers younger than the earliest eligibility age at any point in time, given that UI and DI programs ofer a positive replacement rate before reaching this threshold. Panel B shows the trends in the aggregated weighted social security wealth. We see that weighted social security wealth has been increasing over time, for all ages. This is the result of the aggregation of the diferent routes into retirement, as social security wealth in each of the pathways has been either constant or depicted a small increase over time.

Figure 14: Time-Varying Weighted Incentives Calculation (after-tax values in e1,000 at 2015 prices) Panel A. Replacement Rate

Panel B. Social Security Wealth

Panel C. Accrual of Social Security Wealth

Panel D. Implicit Tax Rate

5 Social Security Incentives and Employment

In this section, we analyze the correlations between the employment rate and the retirement incentives from the social security program. We first examine these correlations graphically, by plotting the employment rate against the weighted implicit tax rate of working an additional year. We present the results in Subsection 5.1. In Subsection 5.2, we use out of the labor force transitions from the Labor Force Survey (EPA) to provide estimates of the association between the implicit tax/subsidy rate and transitions from employment to retirement.

5.1 Graphical Representations

Figure 15 plots the employment rate of men and women over the implicit tax rate from the old-age pension scheme weighted over earnings level, for age groups fifty-five to fifty-nine and sixty to sixty-four. The graphs also show a linear fitted line over the scatter plot, as well as the correlations between the employment rate and the implicit tax rate.

We find that both the significance and the sign of these correlations vary across age groups and gender. For men aged sixty to sixty-four, we find a significant positive correlation between their employment rate and the implicit tax rate. This suggests that the higher the implicit tax (i.e., the incentives to retire), the higher the employment rates of this population group. We find a similar counterintuitive result, albeit statistically insignificant, among women aged fifty-four to fifty-nine. The sign of the correlation is as expected for men aged fifty-four to fifty-nine, albeit statistically insignificant, and among women aged sixty to sixty-four. Only among this group, we find that a higher implicit tax rate is statistically significantly associated with lower employment rates.

5.2 Correlation Estimates

The previous figures suggest that trends in financial incentives are not associated with changes in the employment rate. However, the lack of a simple relationship between overall employment rates and aggregate financial incentives measures can be driven by the importance of other factors. García-Gómez et al. (2018) show that other factors like changes in the skill composition of workers, cohort efects in female labor force participation or economic conditions have probably played a larger role in explaining trends in employment rates among older Spanish workers over the past decades. However, this does not rule out that financial incentives are still important determinants of transitions out of the labor force among Spanish workers.

Figure 15: Employment rates over weighted implicit tax rates of men and women

To get a better idea of the potential efect of social security incentives, we assess its association with the probability of transitioning out of the labor force. In this section, we provide such estimates. We focus in particular on transitions out of the labor force for employed workers and contrast it with the incentives provided by the old-age pension system. For each individual, we obtain information on her current employment status and the situation in the previous year from the EPA for years 1978-2004 and 2006-2016. We then construct an indicator for transition out of the labor force using the information from employment situation in the previous year compared to the current employment situation. As we only consider the incentives from the old-age pathway, we focus on claimants that were employed at time t − 1. We aggregate the data at the regional level for the analysis. We estimate the following linear model:

\[T r _ {a r t} ^ {e m p} = \alpha + \beta I N C _ {a t} + X _ {a t} + \mu_ {t} + \epsilon_ {a r t}\tag{5}\]

Where is the share of the employed population of age a in region r in year transiting out of the labor force, are the incentive measures aggregated at the region level (implicit tax rate and social security wealth), are the covariates (age in all models, and dummy variables for the earliest and statutory eligibility age in Model 4), and are year fixed efects. Standard errors are clustered at the region and year level.

Table 3 shows the results. Model 1 shows a statistically significant positive impact of the implicit tax rate on the share of the population that exits the labor force. In particular, a 0.1 increase in the implicit tax rate increases the share of the population that exits the labor force by 1.3 percentage points. This efect is quite similar to that obtained in Model 3, where we also include the logarithm of the social security wealth. The magnitude of the association with the aggregate social security wealth is smaller: a one percent higher social security wealth increases the share of the population that exits the labor force by 0.163 percentage points. And the estimated efect of social security wealth is similar when we also control for the implicit tax rate. Last, we include two dummy variables for the earliest and statutory eligibility age in Model 4. We estimate statistically significant positive efects from both the earliest and statutory eligibility age, although the efects are small compared to the estimated efect of the implicit tax rate. Importantly, the inclusion of these controls does not change the magnitude of the estimates for the implicit tax rate or the social security wealth, and it does not afect their significance either. Our results suggest there is a strong association between the social security incentives and the exit from the labor force.

Table 3: Exit from the labor force of employed individuals

Notes: Estimates of the association between aggregate social security incentives and the share of the employed population aged fifty-five to sixty-nine that exits the labor force. We aggregate these shares over gender and earnings for each region. All models control for age and year fixed efects, and have their standard errors clustered by region and year. Model 1 includes the implicit tax rate as explanatory variable, whereas Model 2 includes the logarithm of the social security wealth. Model 3 includes both variables. Model 4 includes in addition a dummy variable for the earliest eligibility age, and a dummy variable for the statutory eligibility age.

6 Concluding Remarks

Employment and labor force participation trends of older male workers in Spain, and elsewhere, reverted and started to increase around the mid-1990s after two decades continually falling. In this work, we analyze to what extent the incentives from the social security system can play a role in explaining this evolution. In this respect, we extend existing evidence on the impact of financial incentives on labor force participation in Spain (Boldrin et al. 1999), by computing the financial incentives to leave the labor market that Spanish workers aged fifty-five to sixty-nine have faced during the past four decades through three diferent pathways: Old-age pension system, disability insurance and unemployment insurance. Our primary measure is the implicit tax rate that compares the change in social security wealth from working an additional year with the earnings obtained during the additional year of work. We compute the implicit tax rate for diferent types of workers based on their gender and skill level using both a common earnings profile based on data from Germany, US, and Italy, as well as a Spanish specific earnings profiles.

Our results show that, in general, and excluding those having very low wages or discontinued careers which lead to minimum pensions at all ages (Jiménez-Martín 2014), incentive profiles for the diferent cohorts are very similar, except for some specific cases in which changes in eligibility ages play a crucial role. Regarding the variation of incentives over time, we find that apart from the substantial real growth of pension rights (Social Security Wealth) observed in the last 35 years and the efect of changes in eligibility conditions, the results seem to be remarkably stable.

As a summary exercise, we compute bivariate correlations between the implicit tax rate and the employment rate of the diferent types of workers over time and estimate simple regression models exploiting the regional and temporal variation of the data. We find that both the implicit tax rate and social security wealth are important determinants of transitions out of the labor force even after controlling for the earliest and the statutory eligibility ages. Therefore, our results contrast with the previous evidence (see Boldrin et al. (2004), García-Pérez et al. (2013) or Sánchez-Martin et al. (2014)), probably due to the availability of long time series in our analysis. Our results provide suggestive evidence that financial incentives, and later reforms, may be able to explain part of the initial decrease and later increase in labor force participation at older ages in Spain.

Our analysis and conclusions are based on estimates for workers without interrupted working careers or very low wages leading to minimum pensions at all ages (which generally disincentivize work, see Jiménez-Martín 2014 for a discussion). This limitation is more important among women who are more likely to experience interrupted labor market trajectories due to maternity episodes. This is particularly relevant for the oldest cohorts of women in our analysis. In this sense, further research should exploit individual variation to investigate the role of financial incentives among a more representative sample of the Spanish working population

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A Appendix

A.1 Key parameters of the Spanish Social Security System from 1980 onwards

Table 4 Key parameters of old age pensions from 1 980 onwards

a In 1 997 the last 1 08 months are included the last 1 20 months in 1 998 the last 1 32 months in 1 999 the last 1 44 months in 2000 the last 1 56 months in 200 1 the last 1 80 months from 2002 onwards .

Table 5 Key parameters of old age pensions from 1 980 onwards cont

a The retirement age of 67 will be reached in 202 7. From 20 1 3 to 20 1 8 retirement age will increase in one month per year . From 20 1 9 to 2026 retirement age will increase in two months per year .

Table 6 Summary of key parameters of DI

a There are tax deductions for IPT beneficiaries who are employed at the same time than receiving benefits . Precisely there is a reduction in the earnings used to calculate the income tax of 2 800 Euros/year if their degree of disability is low (between 33% and 65 % ) or 6 200 if the disability level is higher (more than 65 % ) or if the disabled has reduced mobility.

Classification of degrees of disability:

Incapacity to perform current j ob (IPT and IPTC ) : The individual is impaired to develop all or the funda ment al t asks of his/her usual j ob or professional activity but he/she is still capable of developing a diferent j ob or professional act ivit_y.

Full incapacity (IPA) : the individual is impaired for the development of any kind of j ob or professional activity

Severe incapacity ( GI) : Individuals who as a result of anatomic or functional loses need the assistance of a third person to develop essential activities of daily living .