From “illusory” reading to pension plans: The X-ray to Social Security

O working group created to study the sustainability of social security presented the report with conclusions – and suggestions – on tuesday, with several messages. Let's go to pieces to remember the essentials.  

Isolated reading of Social Security and CGA “is illusory and incorrect”

The working group set up to study the social security reform argues that analyzing the social security system alone is a “incorrect, incomplete and illusory” reading of the sustainability of social security.

“Any isolated reading of the balances of the CGA [General Pensions Box] and the social security system is illusory and incorrect“, said Jorge Bravo, economist and coordinator of the working group created to study the reform of social security, in the presentation of the conclusions, in Lisbon.

The final report entitled “Reform Pensions in Portugal – For a Sustainable, Adequate and Fair System – a Contract between Generations”, Jorge Bravo argued that “the correct analysis would be a joint analysis” of both systems.

The person responsible recalled that the changes made caused the CGA to no longer have as a source of funding the contributions and contributions of workers who “came to be transferred to the social security system without immediately reflecting on current expenditure”.

“ We are talking about young public workers, who are constituting rights, but whose pensions are paid only 40 to 45 years after their entry into the public service, which creates, from the point of view of budgetary execution, an illusion as to the financial ‘performance’ of both the CGA and the social security system, he maintained, stressing that this analysis “can create an illusion in society about the financial position of the regime”.

This “financial interdependence (...) cannot be neglected”, he added.

In the group’s calculations, the contributions of workers in public functions who passed to the social security system “represented 11% of the total social security system”, and since 2006, adding contributions and contributions would amount to EUR 26,500 million.

“If they had been reserved and capitalised on the profitability rates of the Financial Stabilisation and Social Security Fund today they would be worth EUR 34 billion, i.e. around 82%” of the FEFFS.

On the other hand, the professor of NOVA IMS also considered that if there were no such “only accounting effect, there would not have been the majority of the surplus of the social security system”.

In the projections, the CGA’s pensions “will reach a peak between 2045 and 2050” of about EUR 20 billion, and the value will go down “gradually as these generations of public workers go out into retirement”.

“ What is estimated is that by 2110 there will be expenditure in the CGA, which will have to be all financed by transfers from the State budget ", anticipated.

The coordinator of the working group argued that this situation “has strongly undermined the position of these workers who have fulfilled exactly the same intergenerational contract as that of the General Social Security Regime, but who now see their pensions mostly depending on whether or not there is budgetary availability every year”.

In this sense, the working group suggests that a sectoral assessment report be made “with the integrated projection of all contributing systems”, as well as that the Social Security Bases Act be complied with, in particular in the principle of adequacy of funding sources, that is, “the idea that contributions should be financed tendingly by contributions and contributions, non-contributory benefits by transfers from the State Budget or other ancillary sources”.

According to the same, if we add the balances of the social security system and those of the convergent social protection regime, eliminating the “reclassification effects”, the joint balance “is negative in all analyzed years”.

“ The overall balance of the contribution systems has always been negative in Portugal,” he said, adding that, if the effect of pensions is corrected in advance by the end of 2025, the current balance would be a deficit of around EUR 1,944 million.

Experts propose automatic pension plans

Besides, the working group defended the adoption of occupational pension plans for automatic membership, which allow the waiver of.

According to group coordinator Jorge Bravo, this measure would be important “to supplement the public pension, not to replace it”.

“in the event of the conclusion of a contract of employment, or for those already in existence, an automatic registration is made, and they are eligible for the system, but always retaining the option of, not wanting to participate, exercising a waiver clause“.

In this way, the burden of the decision is reversed, “because it has been proven, in the countries in which this system was adopted, that the simple reversal of the complementary point of view of the burden of the decision would cause the increase in participation to be exponentially greater,” he explained.

This system would be built in three stages: the enrollment phase, the saving accumulation phase and the decumulation phase.

At the decision stage, “the worker basically has to decide whether to participate or not and it has to be defined who are the workers who are automatically eligible”.

At the time of accumulation, a contributing model has to be decided, i.e. what the minimum contribution rates are and how the total contribution is distributed among the parties involved: worker, employer and State.

On the other hand, in the phase of de-accumulation the modalities of reimbursement have to be defined, “that is, how that worker will have access to his savings”, he explained.

According to the work group, the contribution rate between 8% and 10% is proposed, and its introduction is “gradual and phased”.

Another of the measures suggested by the working group is the creation of a young savings account, aimed at children and young people and with automatic registration, in such a way as to “promoting social security early on”.

The question is the “grain-to-grain program” that also aims to serve as “pretext” to introduce financial literacy into schools, Jorge Bravo, economist and coordinator of the working group, explained.

According to the coordinator, this is an individual savings account for the reform, aimed at children and young people, being “of a universal nature and automatic registration”.

“ All children living in Portugal enrolled in the education systems are automatically registered and receive public support if the proposal was naturally approved”, he suggested.