Introducing individual savings accounts for severance pay in Spain

Abstract

This report provides an ex ante assessment of the distributional effects of introducing portable severance pay accounts in Spain based on micro-simulations. In the current system, permanent workers who are dismissed from their job are entitled to 20 days of severance pay per year of service, which is relatively high by OECD standards. The report considers a reform that replaces the current severance payment system with individual saving accounts financed through periodic contributions by employers. The report focuses on two versions of the reform that keep constant respectively the total compensation in case of dismissal (“constant benefit”) or the expected costs for firms of employing a permanent worker (“constant-cost”). Importantly, the analysis in the report does do not take account of the behavioural responses of firms and workers to the reform.