Ten Principles of the 1995 Pact of Toledo for Social Security Reform

The Covenant of Toledo (Pact of Toledo)

The Pact of Toledo, signed on April 12, 1995, established a consensus on social policy measures among all political forces, employer groups, and union organizations in Spain. Professor Villa synthesized the agreement into the following 10 core principles:

The 10 Principles of the Social Security Reform

1. Classification of Funding Sources

This principle mandates that contributory benefits must be paid from the contributions of those obligated within the system, while non-contributory benefits are financed from the general state budget.

• Contributory Benefits: Funded by contributions based on individual performance.
• Non-Contributory Benefits: Financed directly from the state budget.

2. Establishment of a Reserve Fund

A reserve fund must be established based on the surplus generated by the system. This fund is crucial for safeguarding and ensuring the long-term stability of the state social security system.

3. Alignment of Contribution Bases and Real Wages

The goal is to achieve overlap between contribution bases and real wages, thereby establishing solidarity and redistribution mechanisms within the system.

4. Adequacy of Special Arrangements

Special arrangements must be adjusted so that perceived benefits progressively equate for all subjects, regardless of their employment status or the specific social security scheme to which they are assigned.

5. Improving Collection Systems

Improving collection systems is essential to effectively combat the underground economy and reduce default rates.

6. Reduction of Social Contributions

Social contributions should be reduced as a strategic measure to promote employment.

7. Proportionality of Contributions and Benefits

This principle seeks progressive proportionality between the contribution effort and the benefits received. Historically, contributors often paid proportionately more than they received; the Pact of Toledo addressed this by increasing the responsibility for the minimum pension.

8. Relaxation of the Retirement Age

The normal retirement age was set at 65 years, with the relaxation meaning there is no obligation for the individual to cease their occupation upon reaching that age.

9. Management of Temporary Disability and Sick Leave

Management systems concerning temporary disability, sick leave, and permanent disability must be improved to prevent fraudulent situations. Mutual insurance companies (Mutuas) are responsible for managing workplace accidents on behalf of the employer.

10. Integration of Private Social Protection

This involves encouraging the voluntary subscription and integration of private social protection systems into the overall framework.