OECD - OECD Reviews of Pension Systems: Portugal

This review provides a detailed analysis of the different components of the Portuguese pension system, which consists of an old-age safety net, a pay-as-you-go earnings-related public scheme and voluntary private pensions. It assesses the system according to the OECD best practices and guidelines, and draws on international experiences to make recommendations for improvement. It also addresses the effects of recent labour market trends on future retirement benefits and on the pension coverage of workers in non-standard forms of employment.

Portugal is ageing rapidly. The projected decrease of the working-age population until 2050 will be among the largest in the OECD, leading to a substantial fall in the number of contributors to the pension system. Retirement finances will be put under stress as a result. Old-age inequality is high in Portugal but thanks to safety-net provisions, the relative old-age poverty rate is below the OECD average. The labour market has been recovering from the deep and prolonged crisis of 2008-09 in Portugal and employment rates are now close to the OECD average. Yet, for those who were affected the crisis is likely to leave its mark on future pensions. The main recommendations are presented below.

• Simplify non-contributory benefits to avoid the multiplication of instruments with similar objectives. In particular, merge the old-age social pension, the complement (CES) and the top-up (CSI), and remove the CSIs means testing to descendants income . The interaction between numerous non-contributory schemes pursuing similar objectives is unduly complex. Means-testing the CSI not only at the household level but also including descendants income might cut cost by restricting the number of beneficiaries but makes the pension system complicated. The administrative complexity generates costs and long waiting times, and some people may be discouraged or uncomfortable to have their childrens income means-tested.

• Lower the minimum contribution period of 15 years required for the minimum pension, adjust the benefit level accordingly and ensure that each additional year of contribution results in a higher minimum pension benefit . For those currently entering the labour market there are three levels of minimum pensions available: one for those with 15-20 years of contributions, one for those with 21-30 years of contributions and one for those with 31 years of contributions or more. In Portugal, the minimum pension provides little additional benefit from working longer. Only those with contributory periods just below the thresholds of 15, 21 and 31 years benefit from working longer in terms of the minimum pension.

• Separate the uprating of the initial minimum pension benefit at retirement from the indexation of minimum pensions in payment . The uprating of the initial benefit should be closely related to average- or minimum-wage growth to ensure a stable level relative to labour income over time.