Another European country adapts to demography

money.jpgReforms in Europe have recently been a story of protesting students and general societal inertia to adapt to changes. However, one area where many EU countries are actually beginning to see the need for reform is in their pension systems. People are getting older and essentially this means that they are also able to work longer. Consequently, the UK is already at it and Denmark as well. Now also Portugal seeks to adapt to a population pyramid with increasingly more broad shoulders. The interesting thing here is the implicit pro-natality measures.

"People with fewer than two children will be expected to contribute more towards their pension, in a package of reforms described by the Portuguese prime minister as the most ambitious and comprehensive in Europe.

The measures, due to be approved this summer, will also offer workers the choice of working longer or increasing their pension contributions.

Portugal, like several other European Union countries, faces a pensions crisis following a sharp fall in birth rates and increased longevity. “We have to act now,” José Sócrates, the country’s Socialist prime minister, told the FT. “Every delay means bigger problems and bigger costs in the future.”

In relative terms, pensions in Portugal are currently among the most generous in the EU, often reaching more than 100 per cent of an employee’s final salary. If no measures are taken, the system would face financial collapse by 2015, said Mr Sócrates. The planned reforms would guarantee its sustainability up to 2050 and beyond.

According to an analysis by Sara Peralta, an independent Portuguese economist, the reforms will reduce most pensions by at least 10 per cent for people retiring over the next 20 years and will hit high earners the hardest.

The measures include a “sustainability co-efficient” that will be used to adjust pensions according to changes in life expectancy during the working life of contributors. If, for example, average life expectancy were increased by one year over the next decade, pensions for people retiring in 10 years would be about 5 per cent lower than they would have been without any increase in forecast longevity, said Mr Sócrates.

Workers could opt to offset that by working about five months longer or increasing their contributions.

The most controversial measure is a proposal to vary pension contributions as a percentage of earnings according to the number of children employees have. Contribution rates would remain unchanged for people with two children, decrease if they had more than two and increase if they had fewer than two."