PORTUGAL - The IMF has said that the Portuguese pension system remains fundamentally unsustainable, despite earlier pension reforms and to stabilise the system, pension benefits may have to be reduced.
In a report on pension reform in Portugal, the IMF said that Portugal will face adverse demographic trends in the coming decades which will result in significant ageing-related spending pressures, in the absence of further reforms.
“While the Portuguese public pension system has undergone a number of reforms, including most recently in 2000 and 2002, and pension expenditures are slightly below the EU average, the system remain fundamentally unsustainable in its present form,” the report said.
It added that with general government debt burden already approaching 60% of GDP and with social insurance contribution rate above the high EU average, there was little scope to finance these coming spending pressures.
The organisation suggested that comprehensive reforms, including a shift to a defined contribution pillar, should be adopted to meet the “significant” ageing-related pension expenditure pressures.
The paper said that one possible reform to be considered was a phased increase in the retirement age. An increase in the retirement age to 69 years by 2040 would reduce projected pension expenditures by almost 1 percentage point of GDP and by a similar amount under low-growth macroeconomic scenario. The study however added that this reform alone would not be sufficient enough to make the system fundamentally sustainable.
The IMF report proposed that a reduction in the accrual rate would reduce pension expenditure.
Options such as reducing the rate of indexation or increasing the effective rate of taxation of pension incomes should also be considered, the report said.
A fifth possibility, suggested by the study, would be to combine a number of reform options.
It argued that introducing both a higher retirement age and lower indexation would reduce the projected increase in pension expenditure by about one and three-fourths percentage points of GDP and by one and a half percentage points of GDP under the more pessimistic case in 2050.
“The final combination would be sufficient to contain net expenditures at its current level under the authorities’ baseline scenario, while it would offset almost 60% of the increase in the more pessimistic scenario,” the report added.
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