Spain slashes maximum pensions as early retirement penalties for high earners double

Spain’s Social Security system has implemented a significant and largely unpublicised increase in penalties for high-income workers who opt for early retirement.

The move effectively slashes the maximum pension available to those who leave the workforce before the legal retirement age.

Under the new technical updates, the penalty for retiring two years early has jumped from approximately €305 per month to €705 per month.

This comes after Social Security abolished the transitional conditions that offered more favourable early retirement coefficients until 2033, three times lower than those of the rest of the workers.

With this, the penalty on the pension increases sharply, from about 9.1 per cent to 21 per cent. This will have a significant impact on high earners' pensions (people whose salaries exceeded 61,200 euros each years), which would not be able to exceed 2,654 euros.

The Social Security's decision stems from the reform it introduced in 2022 to toughen the penalties for early retirement. Its aim was to discourage this widespread practice where workers leave the labour market when their regulatory base exceeds the maximum pension.

This is particularly detrimental to workers with the highest incomes, who previously hardly noticed the cut in their pensions.

According to Social Security, rises in the maximum pension already offset the benefit and bring payments back in line with the 2021 system. Under those rules, early retirement meant a cut of 0.5 per cent per quarter, up to four per cent over two years, even though the maximum pension was lower at the time (2,707.49 euros).

Experts have raised an eyebrow at the lack of effort to communicate the measure. The announcement has been limited to a brief message in the official Social Security platform that has gone largely unnoticed.

"Many reforms of this kind are being introduced quietly and without being properly communicated to the public," managing partner Bufete Barrilero y Asociados José Ramón Mínguez says.

"Professionals who are calculating pensions should be very careful because the Social Security has already incorporated it into the spreadsheet," Garrigues law firm partner Begoña de Frutos warns.

Trade unions have strongly criticised "the lack of formal communication" of this measure and demanded calrity from the National Institute of Social Security.

In the meantime, some workers who have been planning to retire early have started to express their uncertainty. The current situation casts too many doubts.

Managing director of Algorta consultancy firm Pompeyo Herreros warns that the issue will eventually end up in court. "Of course, our pensioners' associations are sure to take it all the way," he says.

Pension advisers recommend that people apply for retirement with effect from 31 December. Although the maximum pension was slightly lower at that point (3,267.60 euros), the penalty was also lower (7.4 per cent) and retirees would benefit from the annual inflation-linked increase in the new year.

In practice, people who were already out of work can backdate their pension by up to 90 days, meaning this option is available until 31 March. However, it does not apply to those who are still working. For them, it may make sense, where possible, to delay early retirement, as the penalties fall quite quickly and would drop to around 8.8 per cent within six months.