The value of the average pension will decline sharply over the next 48 years, as much as we already have from democracy, if the pension payment system does not undergo a major reform. In 2070, the average pension could be worth just 38% of the average salary. The conclusion is in the book “Ambition: Doubling GDP in 20 Years” by the Association for Economic and Social Development (SEDES) to which DN/Dinheiro Vivo had access. The work, coordinated by the president of the association, Álvaro Beleza, and by the chairman of the advisory board of the same institution, Abel Mateus, will be launched today in Porto.
In 48 years an employee with an average monthly salary of 2571 euros, in 14 months, will only receive a benefit of 1005 euros, which amounts to only 38% of the wages he earned. If these forecasts from the working group coordinated by Maria João Louro come true, this will mean a significant loss of purchasing power for these pensioners by 2070. At the moment, and in light of the 2019 accounts, the difference is smaller. For example, if you earn 1285 euros per month, for 14 months, and if you apply for a pension, you can count on a pension of 950 euros, or 72% of your salary.
From 2019 to 2070, experts emphasize that, despite the doubling of the average salary from 18 thousand euros to 36 thousand euros, the average pension in real terms only increases by 11% from 13.3 thousand to 14.76 thousand euros. It is also estimated that the retirement age will increase from 66 to 69 in 2070.
The projections take into account slow growth in Gross Domestic Product (GDP) and a sharp deterioration in the dependency rate, which measures the ratio of the over-65s to the population aged 15-64. “In such a way that by 2050 Portugal will have the highest dependency rate, comparable to Spain, on the countries of the European Union (EU),” the work explains.
“The demographic evolution combined with slow growth in potential GDP, about 1% per year, well below the EU average, has devastating consequences for the lack of progress in the Portuguese economy and in particular for the pension reform system. warn the experts.
The main consequence, in Portugal, will be the sharp reduction in the pension replacement rate in relation to final salaries. In Portugal, this ratio drops from 74% in 2019 to 41% in 2070. The 33% drop is surpassed only by Spain (36%) and Latvia (35%).
The work also cites the scenario carried out by the Portuguese Association of Investment, Pension and Heritage Funds (APFIPP). Taking into account relatively positive variables – such as an average annual GDP of 1.7%, an average unemployment rate of 8%, an annual labor productivity increase of 1.4% and an annual inflation of 2% – the APFIPP, nevertheless, estimates that “the pension deficit before retirement from the premium system will worsen in the coming years, leaving a budget deficit of more than 5% of GDP until 2046″. “If we add to these figures those of social pensions, which represent a deficit of 1.6% of GDP, it means that the primary balance of the state budget needed just to make up for the deficit of social security pensions, no less than 8% of GDP between 2021 and 2036”. APFIPP warns that this “seems to be a very difficult goal to aim for.”
At the moment, the reality seems much more optimistic, taking into account the budget implementation in July, as well as the forecasts of the government, the Bank of Portugal and the European Commission: GDP growth of 6.3%, an increase in tax revenue by 5 billion euros compared to last year and a budget surplus of 432 million euros. However, it is necessary to have a long-term view, to consider the end of the expansionist policy of the European Central Bank with the rise in interest rates to fight inflation, the effects of the war in Ukraine on the energy crisis and the increase in electricity and natural gas, as well as the EUR 16.6 billion bazooka that Portugal has received from the EU and which will not be repeated in the coming years.
That is why reforms are needed now to prepare for the future. “Several studies conclude that there is no financial sustainability of the old-age pension system with the current system: one of them estimates an implicit debt of 148% of GDP over the next 40 years attributable to Caixa Geral de Aposentações and an implicit debt of 73 up to 104% of social security GDP,” writes economist Abel Mateus. To ensure the sound financial health of the public pension system, SEDES proposes: “The pension ceiling, i.e. setting a ceiling above which salary is free of social security contributions; incentives for savings and capitalization systems; continuing indexation of retirement age to life expectancy; flexibility of retirement decision and work after retirement”.
One of the main objectives of SEDES’s work is to make proposals to double GDP every 20 years, bearing in mind that the Portuguese economy has stagnated since 2000. It means that the Portuguese today have a standard of living similar to that of 20 years ago: in 2000 GDP per capita, in purchasing power parity and at 2015 prices, was 21,284 euros and last year it was 21,850 euros per inhabitant. .
The reform of the pension system is one of the engines of economic growth. But not alone. The “fiscal shock”, from the cut in taxes, combined with the cut in government spending, is another weapon in the service of the state to get the machine running again.