20 April 2006

IPE: OECD warns on Portuguese pension system

The Organisation for Economic Cooperation and Development has warned that the Portuguese pension system needs radical action to keep it financially viable. “A key pending reform is the reform of the general pension system to ensure its viability,” the OECD said in an economic survey. “The system is under strong pressures arising not only from the ageing population but also from its maturation and the high replacement rates granted to pensioners.”

The Paris-based organization said official simulations show that the system will likely be in deficit by 2007, and could be financed thereafter for only seven years by the pension trust fund. It added: “Therefore action is urgent.”

A working group has been appointed and some of its proposals are being considered, such as introducing incentives to increase the effective retirement age.

“It is important that action in this area is not delayed,” the OECD said. “More radical changes should be envisaged, such as adjusting replacement rates and/or the retirement age for changes in life expectancy and limiting the costs of transition by a relatively rapid phasing in.”

The comments come amid expectations of 2005 budget deficit of 6.3% of GDP. Since coming into office the new government has increased VAT, reduced the right to early retirement and modified the very favourable civil service pension plan to bring it into line with the rest of the state pension system.

The previous PSD government had undertaken pension reforms. In 2002 it shifted the basis of calculation for state pensions for people who retire after 2017 to a full career-average income realigned for inflation from the average of the 10 best years over an employee’s last 15 years indexed to inflation. And in 2003 it introduced tax incentives for those investing in third-pillar savings products.

But it did not portray the changes as part of a strategy to fend off a looming crisis; rather they were presented as a solution. The result is that the Portuguese public is largely unaware of the pension problem, has not realised the implications of the PSD alterations and continues to complacently expect the state to provide a retirement income that is the equivalent of 80% of a salary.

OECD Survey
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