Portugal: Sticking to the pension promise

In March, a snap general election took place following the resignation of Portugal’s then-prime minister, António Costa, after an investigation into alleged corruption involving the awarding of concessions for lithium mines and hydrogen production.

Costa’s Socialist Party (PS) lost its majority, overtaken by the centre-right Democratic Alliance (AD) led by Luis Montenegro, who became the new prime minister and formed a minority government.

Part of AD’s election pitch was a vow “not to cut one cent from any pension”, but to gradually increase payments. Montenegro said the minimum monthly benefit for low-income pensioners should reach €820 by 2028, the expected date of the next parliamentary election.

The new government reiterated its promise in presenting its inaugural budget in early April, saying it would maintain balanced budgets while reducing the country’s public debt. 

It has been handed a fighting chance of fulfilling these promises by the previous administration: last year delivered a stronger-than-expected budget surplus of 1.2% of GDP, compared with a deficit of 0.3% in 2022.

In July, the Council of Ministers approved 60 fiscal and economic measures as part of the government’s “Accelerating the economy” programme. These include reviving the talent attraction scheme, launched in 2009 but axed by Costa last year.

The original scheme – formally known as the non-habitual resident scheme (NHR) – was intended to boost the economy after the global financial crisis by attracting entrepreneurs, professionals, high net-worth individuals and retirees. These individuals paid a flat 20% tax rate – compared with standard tax rates of between 14.5% and 53% – on Portuguese income for ten years, while most of their foreign income, including pensions, was tax-exempt.

But from 1 April 2020, a flat 10% tax rate was applied to foreign pension income for new entrants to the scheme. This followed complaints from Nordic countries that retirees attracted by the NHR regime had stopped paying taxes in their home countries.

The new government is re-introducing the scheme, but pension income from abroad will now be taxed.

The scheme forms part of Portugal’s new immigration measures to stabilise its pension system, and strengthen the economy by attracting foreign labour to fill job positions as the population ages.

Portugal’s population has decreased in recent years, currently estimated at 10.2m but projected to fall to 9.1m by 2050, according to the World Population Review.

The country also has one of the fastest ageing rates in the European Union. 

More than a third of workers are aged 50 and over, an increase from a quarter in 2011. 

In spite of its demographic challenges, however, Portugal was declared the highest-scoring country for the adequacy of its pension system in the annual Mercer CFA Institute Global Pension Index published last autumn.

Adequacy is determined from the basic level of income provided by each system, as well as the net replacement rate of income levels ranging from 50% to 150% of the average wage.

However, Portugal still ranked only 18 out of 47 countries covered by the index, using the sub-indices of adequacy, sustainability and integrity to benchmark systems against over 50 indicators.