Portugal’s pension system needs to prepare for rapid population ageing

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This article is brought to you in association with OECD.


Portugal needs to reform its pensions system to address the challenges of a fast-shrinking workforce and high levels of old-age inequality, according to a new OECD report.

The OECD Reviews of Pension Systems: Portugal says the country’s rapidly ageing population, a result of low fertility and rising life expectancy, is putting pressure on pension finances. The total population recently started to shrink and is projected to fall below 9 million by 2050 from a peak of 10.7 million in 2009, due to a sharp decrease in the number of young people and working-age adults.

The working-age population decline will be among the steepest among OECD countries, with the number of 20-64 year-olds set to fall by 30% by 2050 compared with an average drop of 5% on average in the OECD area. There will be 7 people older than 65 years for 10 people of working-age in 2050, against slightly more than 1 in 3 now and 1 in 5 in 1975. This could have a major impact on the labour market, economic growth and pension finances, according to the report.

“Portugal has profoundly reformed its pension system over the past decades and made it more financially sustainable,” said Stefano Scarpetta, OECD Director for Employment, Labour and Social Affairs, launching the report in Lisbon with Portugal’s Minister of Labour, Solidarity and Social Security, José António Vieira da Silva. “Now the focus should be on strengthening the incentives and ability of older people to stay longer in the labour market, simplifying the old-age safety-net and pension system, and improving its design to better cope with longer lives.”

Recent major pension reforms in Portugal have included aligning the retirement age between women and men; linking the retirement age to life expectancy; increasing the period to calculate the reference wage; and gradually integrating the scheme for civil servants with the general regime. However, the current pension system can still be improved.

Income inequality among older people is high in Portugal, even though safety-net provisions reduce the risk of old-age poverty, which is below the OECD average. However, access to these provisions is not always straightforward. Administrative complexity generates costs and contributes to long waiting times, and some people may be discouraged to apply for benefits. At the same time, non-contributory benefits should be simplified to avoid the multiplication of instruments with similar objectives. In particular, the old-age social pension, the complement (CES), and the top-up (CSI) should be merged while the CSI’s means testing to children’s income should be removed.

The current link between the statutory retirement age and changes in life expectancy is needed to ensure the financial sustainability of pension systems. That link should be extended to the minimum age of early retirement. Moreover, while longer working lives should be encouraged, the sustainability factor, which was reformed in 2014, only generates a very large penalty in case of early retirement. While appropriate financial penalties for early retirement are needed, the sustainability factor should rather be used to adjust pension benefits across the board as an ultimate instrument to ensure financial sustainability.

Incentives to contribute to voluntary pension schemes should also be improved and occupational plans promoted to increase coverage. Pension fund regulation should be enhanced.

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