Structure of the Portugal Pension Review Four thematic chapters - PDF document

20/03/2019 OECD REVIEWS OF PENSION SYSTEMS: PORTUGAL Hervé Boulhol, Senior Economist, OECD Directorate for Employment, Labour and Social Affairs Lisbon, 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 1

20/03/2019 Relative income of older people in Portugal is well above the OECD average Gross average income of people aged over 65, % of total population average income, 2014 or latest available year 110 100 90 80 70 60 50 Figure 3.9 3 Relative old-age poverty is below average Relative old-age poverty, 2015, less than half median income 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Figure 2.1 4 2

20/03/2019 Relative old-age poverty is below average, but income inequality is high Relative old-age poverty, 2015, Gini coefficient, less than half median income after taxes and transfers, 2015 Population above 65 Total population 50% ,0.40 45% 40% ,0.35 35% 30% ,0.30 25% 20% ,0.25 15% 10% ,0.20 5% 0% ,0.15 Figure 2.1 Figure 2.3 5 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 3

20/03/2019 Retirement age is linked to life expectancy Statutory retirement age in Portugal Statutory 70 69 68 67 66 65 64 63 Figure 3.17 7 Retirement age is linked to life expectancy Statutory retirement age and normal retirement age after a full career in Portugal Statutory Normal (entry at 20) Entry at 25 70 69 68 67 66 65 64 63 Figure 3.17 8 4

20/03/2019 Retirement age is linked to life expectancy Normal retirement ages, full career from age 20, Portugal vs OECD average Normal (entry at 20) Normal, OECD average, entry 20 70 69 68 67 66 65 64 63 Figure 3.17 9 Replacement rates are high for full-career workers compared with other countries Future gross replacement rates , workers with a full career from age 20, mandatory schemes, % Average wage Half average wage 140 120 100 80 60 40 20 0 Figure 3.17 10 5

20/03/2019 Accrual rates are complex and high Average annual accrual rate over Future average accrual rate, depending on the career length, average earners average-wage worker 2.5% 2.5% 2.0% 2.0% 1.5% 1.5% 1.0% 1.0% 0.5% 0.5% 0.0% 0.0% 0 5 10 15 20 25 30 35 40 45 Career length Figure 3.11A Figure 3.12 11 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 6

20/03/2019 Coverage of private pension plans is lower than other OECD countries Occupational plans - active members as % of working-age population 80% 70% 60% 50% 40% 30% 20% 10% 0% Personal plans - active members as % of working-age population 80% 70% 60% 50% 40% 30% 20% 10% 0% 13 Recipients of first-tier pensions, % of population 65+ CSI Social pension Minimum pension 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Figure 2.18 14 7

20/03/2019 Only the highest minimum pension exceeds the CSI Minimum pension, social pension and CSI as a % of the average wage Social pension CSI Minimum pension 35% 30% 25% 20% 15% 10% 5% 0% 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 Figure 2.20 15 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 8

20/03/2019 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 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 18 9

20/03/2019 Thank you 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 10