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OECD REVIEWS OF PENSION SYSTEMS:

PORTUGAL

Hervé Boulhol, Senior Economist, OECD

Directorate for Employment, Labour and Social AffairsLisbon, 20 March 2019

Structure of the Portugal Pension Review

Four thematic chapters

• First layer of social protection in old age

• Earnings-related mandatory pensions

• Voluntary pension arrangements

• Labour market developments and pensions

Each chapter concludes with some policy recommendations

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Relative income of older people in Portugalis well above the OECD average

3

Gross average income of people aged over 65, % of total population average income, 2014 or latest available year

Figure 3.9

50

60

70

80

90

100

110

Relative old-age poverty is below average

4

Relative old-age poverty, 2015,less than half median income

Figure 2.1

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

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Relative old-age poverty is below average, but income inequality is high

5

,0.15

,0.20

,0.25

,0.30

,0.35

,0.40

Population above 65 Total population

Relative old-age poverty, 2015,less than half median income

Gini coefficient, after taxes and transfers, 2015

Figure 2.1 Figure 2.3

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Substantial pension reforms in Portugal

over the last two decades

Main reforms affected different areas:

• Introduction of CSI, indexation rules (2006, 2007)

• Formula for earnings-related pensions (1993, 1999, 2002, 2007, 2014)

• Reference period (1993, 1999)

• Retirement age (1999, 2014)

• Early retirement (1999, 2007, 2012, 2014)

• Civil service (1999, 2006)

Main outcomes:

• Higher safety net levels

• More incentives to work longer in line with life expectancy gains

• Lower benefits: reference period, uprating past wages, sustainability factor

• Improved financial sustainability

• Long transition to eliminate the civil-servant special regime

• Overall complexity

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Retirement age is linked to life expectancy

7

Statutory retirement age in Portugal

Figure 3.17

63

64

65

66

67

68

69

70

Statutory

Retirement age is linked to life expectancy

8

Statutory retirement age and normal retirement age after a full career in Portugal

Figure 3.17

63

64

65

66

67

68

69

70

Statutory Normal (entry at 20) Entry at 25

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Retirement age is linked to life expectancy

9

Normal retirement ages, full career from age 20, Portugal vs OECD average

Figure 3.17

63

64

65

66

67

68

69

70

Normal (entry at 20) Normal, OECD average, entry 20

Replacement rates are high for full-career workers compared with other countries

10

Future gross replacement rates,

workers with a full career from age 20, mandatory schemes, %

Figure 3.17

0

20

40

60

80

100

120

140

Average wage Half average wage

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Accrual rates are complex and high

11

Figure 3.11A

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

0 5 10 15 20 25 30 35 40 45Career length

Average annual accrual rate over depending on the career length,

average-wage worker

Future average accrual rate,average earners

Figure 3.12

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Sustainability factor

Adjustment factors in other countries

• Automatic links of benefits to life expectancy in defined contribution schemes, whether funded or notional (Italy, Latvia, Norway, Poland, Sweden)

• Similar mechanism in defined benefit schemes (Finland, Japan, Spain)

• Automatic adjustment rules to changes in dependency ratios or pension finances (Germany, Japan, Spain, Sweden)

Portugal’s sustainability factor

• 2007: introduction to adjust the initial benefit level for new retirees to rising life expectancy

• 2014: abolishment for retirement at the normal retirement age

• Implication: now only affects early retirement, with a huge and increasing impact on benefits on top of the standard penalties

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0%

10%

20%

30%

40%

50%

60%

70%

80%

13

Coverage of private pension plans is

lower than other OECD countries

Occupational plans - active members as % of working-age population

Personal plans - active members as % of working-age population

0%

10%

20%

30%

40%

50%

60%

70%

80%

Recipients of first-tier pensions,

% of population 65+

14

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

CSI Social pension Minimum pension

Figure 2.18

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Only the highest minimum pension exceeds the CSI

15

Minimum pension, social pension and CSI as a % of the average wage

Figure 2.20

0%

5%

10%

15%

20%

25%

30%

35%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48

Career length, years

Social pension CSI Minimum pension

Safety nets /

Non-contributory benefits

• Simplify, to avoid having multiple instruments with similar objectives - in particular by merging the social pension, the CES supplement and the CSI while removing the CSI’s means-testing to descendants

• Lower the minimum contribution period of 15 years for the minimum pension and ensure that each additional year of contribution results in a higher benefit

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Earnings-related pensions

• Duly implement the link between the statutory retirement age and changes in life expectancy, and extend it to the minimum age of early retirement

• Reform the sustainability factor to adjust pension benefit across the board as an ultimate instrument to ensure financial sustainability

• Lower accrual rates and uprate past wages with wage growth

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Voluntary funded pension system

• Increase coverage by improving incentives to contribute to voluntary pension schemes and promoting occupational plans – Simplifying the pension tax system

– Introducing non-tax financial incentives

– Promoting occupational plans

• Improve withdrawal settings from personal plans – Limit early withdrawals from Retirement Savings Plans (PPRs)

– Align retirement age rules with statutory retirement ages

– Discourage taking sizeable retirement savings as lump sums

• Improve regulation – Update assumptions around the minimum funding ratio calculation

– Develop Portuguese mortality tables

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Further information:

http://oe.cd/pensions-portugal-2019

Contact:

herve.boulhol@oecd.org

OECD flagship pension publications:

Pensions at a Glance

http://oe.cd/pag

Pensions Outlook

http://oe.cd/pensionsoutlook

Thank you