Progressivity in updating pensions “is debatable”

Nthe report “Reform Pensions in Portugal – By a Sustainable, Adequate and Fair System – a Contract between Generations”, to which Lusa had access, experts stress that the pension update rule “is relatively predictable”, since “it sits on observable indicators and contains an explicit differentiation in favor of lower-value pensions”, protecting “more intensely” the most vulnerable pensioners, i.e. pensions up to 2 IAS.

This rule, “contributes to mitigating the risk of monetary poverty in old age and to preserving at least partially the purchasing power of the most vulnerable pensioners”, admits, stressing that “this dimension is particularly important in a context in which a significant proportion of the contributing pensions have a reduced value and in which non-contributory support plays an essential function of social protection”.

However, they warn that the use of echelons creates “horizontal equity problems”, arguing that “two pensions of very close value can receive different update rates if they are on opposite sides of a threshold”.

“ In a mature contributing system, in which small differences in the value of the pension may reflect real career payoffs, these progressive breaks can affect the perception of contributing justice and reduce the transparency of the relationship between contributions and rights”, they add.

For the team led by economist and professor Jorge Bravo, “the introduction of progressivity in the rules for updating pensions is debatable in the light of the principles of intragenerational equity and actuarial neutrality, as it weakens the direct signage relationship that must exist between the legal obligation to contribute, the right to benefits and their amount”.

“ In addition, because it is not subject to the condition of resources, this implicit redistribution of average and higher pensions to lower-value pensions does not guarantee that the support is effectively directed to beneficiaries in greater need,” the report argues, indicating that it can cover pensioners who, despite being in the first, “have other significant income or assets, or who have adjusted their contribution to maximize the benefit of the applicable rules.”.

Experts therefore argue that, instead of “the current rigid ranks”, the pension update rule “should be common to all pensioners”, that is, following “a uniform formula”.

During the presentation of the report, on Tuesday, Jorge Bravo had stated that the pension update rule should guarantee all pensioners, “at least the value of inflation”, in order to preserve purchasing power.

The formula it proposes has three components: inflation, real shareable growth “and, eventually, if there are imbalances, an adjustment factor for long-term financial sustainability,” he explained.

By law, the updating of pensions takes into account the actual average growth of Gross Domestic Product (GDP) in the last two years and the average change in the last 12 months of the consumer price index without housing, available in December.

The final report was submitted to the government in July and presented on Tuesday, and among the various proposals suggests the reformulation of the penalty for early retirement, the creation of new public debt instruments of the retail segment to serve as a supplement to the pension or the adoption of professional automatic membership pension plans, which allow the waiver.