Fedea proposes eliminating the MEI from payrolls and replacing it with a surcharge on personal income tax to finance pensions

Fedea (Foundation for Applied Economics Studies) has presented the report ‘Food for thought: contributions to the debate on public policies’ which on this occasion deals with the pension system and the sustainability of the current model. A current topic due to the use that the different political parties are making of it during the electoral campaign. As a fact to take into account, in 2027, the Social Security is going to increase retirement pensions by 57 euros on averagein the event that the CPI (Consumer Price Index) reaches 4.5% in November, although if it drops to 4.3%, the increase will be 55 euros according to the forecasts released by Funcas.

Fedea economists, Ángel de la Fuente, Miguel Ángel García Díaz and Alfonso Sánchez, have proposed replacing the MEI (Intergenerational Equity Mechanism) which increases the contributions of workers and companies, through a surcharge on personal income tax that helps sustain and finance the pension system. One of the problems that weigh on the public coffers is the deficit in these benefits and that is why they raise the question of whether increasing contributions will be the best solution to face an expense that continues to grow.

The report proposes that part of the additional resources needed by Social Security could be obtained with a proportional charge on the Personal Income Tax (IRPF) quota, which would replace the MEI and the so-called ‘solidarity quota’.

The solidarity fee is an extra contribution to Social Security paid by workers who have the higher salaries and their companieswhich was launched on January 1, 2025, within the pension reform.

Increase Social Security income

Currently, public pension coffers are at the center of the political debate, even more so since the Court of Auditors published that European Funds had been used to pay them. One of the solutions that Fedea clings to is the change in the MEI to increase income with an extraordinary contribution that workers and companies would bear. It would be applied progressively until reaching 1.2 percentage points in 2029 and would remain at least until 2050.

The authors of the study point out that it is not clear to them that the additional financing of pensions should be on top of social contributions. They assure that an increase in quotas could have bad consequences on employment and on the distribution of generational burdens.

“Another possible source of additional resources would be to raise social contributions, but this possibility should not be abused too much due to the adverse effects on employment and intergenerational equity,” they quote verbatim in the report.

“A surcharge that is proportional to the state personal income tax quota that, to begin with, could replace the MEI and the solidarity quota.” This would prevent the additional costs of financing contributory benefits from being concentrated in a specific part of the population and would also help to make visible the cost of financing pensions, facilitating debates on cost containment.

The trend continues towards a high deficit

The proposal to change the MEI is among the ideas advanced by Fedea to balance the future of pensions in Spain and according to the data from this study, in 2005 a positive balance was recorded that reached 64,000 million euros in 2025, 3.8% of GDP.

This deficit of the pension system could increase by 2.3 points of the Gross Domestic Product between the years 2025 and 2050, each year allocating additional insurance equivalent to about six points of this indicator to be able to finance it.

They warn of a system that is “too generous” in relation to the resources available, considering it necessary for spending containment measures to come into play. For example, progressively extending the pension calculation period to the person’s entire working life, without ruling out the months of lowest contributions.

The sustainability factor should be recovered by linking the legal retirement age to life expectancy in the future, although exceptions are contemplated.

It is not possible to cut already active pensions

There is a controversial conclusion that these authors have reached and that is the impossibility of ‘putting the scissors’ into already active pensions and they point out that any measure that involves a reduction in recognized benefits, even when there are minor increases in the CPI “should be discarded because it is unviable.”

But there are other options, such as a gradual transition towards a national accounts system that is similar to that used in some Nordic countries such as Sweden, where pensions are more linked to contributions made and the growth of the economy.