The Reform of Pensions in Portugal: A Critical Assessment ENRSP Conference in Poznan, Old Age Crisis and Pension Reform Where do we stand?, 13 September 2012 Maria Clara Murteira Faculdade de Economia da Universidade de Coimbra
The Main Legislative Changes Introduced in Portugal in 2007 A sustainability factor has been included in the pension formula. To avoid the decrease in pensions workers may choose to extend working lives to increase voluntary contributions to a new complementary public scheme of individual accounts. The link between contributions and benefits has been tightened New rules for indexing the benefits were settled The minimum pension was detached from the minimum wage. The maintenance of the real value of all other pensions is not guaranteed. 1
A Critical Assessment of the Reform Firstly, this policy has adverse consequences on pensioners wellbeing. The replacement rate decreases due to: The introduction of the sustainability factor A new way of calculating the benefits based on the earnings of the entire career Income trajectories in retirement will diverge from the overall earnings path in society due to: The new way of adjusting the benefits The burden of the adjustment was placed exclusively on pensioners. This policy direction is particularly adverse in the Portuguese. 2
A Critical Assessment of the Reform Secondly, the reform may also be criticized from a methodological standpoint: it has focused on the means of policies (spending on pensions) and neglected its ends (the social objectives). In fact, the level of benefits has been taken as the adjustment variable. 3
Changing the objectives of the system The objective of safeguarding living standards in retirement was abandoned. - The reduction of the replacement rates - The new rules of adjusting the benefits over time State intervention is becoming focused on the provision of a modest income protection in old age. 4
A Structural Reform Firstly, the reform produced a significant decline in the level of benefits. Secondly, a fundamental change in the objectives of policy has occurred: The objective is no longer enabling people to maintain the previous living standards, but the provision of a minimum income. Thirdly, a profound change has occurred. PAYG has not been replaced by a funding scheme but its nature has been changed: Retirement pensions are no longer seen as a continued salary but as an individual deferred income (Friot, 2008, 2010; Castel, 2009a, 2009b). 5
The influence of the European level in the Portuguese process of reform Especially after the Maastricht Treaty, economic policies have been defined in accordance to the prescriptions of the new classical economics Macroeconomic policies : guided by strict rules (budgetary equilibrium and price stability) Policies for the labour market and social protection Economic policy orientation has imposed pressures for reforming pensions restrictive fiscal policy has imposed direct pressures restrictive rules on macroeconomic policies have imposed indirect pressures An European strategy for pensions, compatible with that economic policy orientation, was designed in parallel. 6
Following Thompson (1998): The economic cost of retirement = (Cr/Y) Retirement costs depend on the level of total income Output is crucial Pensions represent a claim on the output (Barr, 2001, 2004) Demographic ageing increases pensioners share in spending. The problem of pensions is essentially a distributive one: specifying pensioners share of total income. If the output grows, its division becomes easier. 7
The strategy of social rights retrenchment in Portugal The first stage (the 2007 reform) was characterized by pressures to contain spending. The second stage (started by the new right wing government) is characterized by severe pressures on the revenue side of social security budget. Several measures reduce, directly or indirectly, the receipts from contributions. All the variables that influence the amount of contributions are under pressure: the wage, employment and the contribution rate. 8
Conclusions The present crisis reveals the adverse effects of economic policies supply side oriented with regard to growth, employment and the external equilibrium of several Member States, in particular the peripheral nations. Only a paradigmatic change in economic policy may allow the appropriate policies for growth. The problem posed by demographic ageing is one of an increasing share in spending. Economic growth is critical. In a PAYG scheme, pensioners income share depends on the distribution of income between capital and labour and on the division of the labour share between workers and pensioners. Pension policy is about political choices. 9