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Portugal submits draft pensions reform as it struggles with deficit

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  • Portugal submits draft pensions reform as it struggles with deficit

PORTUGAL – The Portuguese government has presented to the Council of Ministers a draft pension reform that will seek to cut Social Security at a time when the country is struggling to get its growing budget deficit under control.

Speaking with IPE, Maria João Louro, a consultant at Towers Watson in Lisbon, said Portugal, which the EU has placed under an economic and financial assistance programme until 2014, was looking to balance it budget deficit, which rose to 7.1% of GDP in March compared with 6.2% last year.

According to João Louro, one of the measures currently under discussion is the 'sustainability factor', which was part of the 2006 pension reform.

The sustainability factor aims to address the impact of life-expectancy increases on the Social Security.

It is calculated as the ratio between life expectancy in 2006 and life expectancy in the year prior to retirement, and would become applicable to pensions paid from 2008 onwards.

João Louro added: "The government might decide to change the method used to calculate the sustainability factor by taking into account new economic variables beyond the current one that focuses sorely on life expectancy."

The government also aims to raise the legal retirement age for public and private sector workers to 66 years, a year longer than what is currently common practice.

The legal retirement age at 65 will remain possible, but at a lower rate of pension.

In May, the OECD called on Portugal to recalibrate pension entitlements and scrap early retirement in order to restore its fiscal health.

According to João Louro, the government might also consider introducing a measure whereby workers deciding to retire at a later stage could see their pensions unaffected by the current measures implemented to cut pension incomes.

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