Future of state pensions seriously under threat

By CHRIS GRAEME [email protected]

Falling birth rates, the retirement of the baby boom generation and the economic crisis are threatening the future of the State pensions in Portugal.

Within 25 years, according to a shock new report, the Portuguese Social Security system based on national insurance contributions won’t be enough to pay for even the most meagre of State pensions.

In the short term, the economic crisis, Portugal’s public sector budget deficit, the departure of many Eastern European immigrants to their countries of origins, the closure of small and medium-sized companies and unemployment are all putting intense pressure on State pensions.

In the long term, the shrinking working population over the next 25 years simply won’t be able to sustain the 1960s baby boom generation as they reach retirement age.

The current projection, set down in the State Budget for 2011, makes it clear that within 25 years, Social Security will be facing financial breaking point.

Eugénio Rosa, a specialist in social affairs, is in no doubt that the “scenario now is worse than when the first projections were made for Social Security in 2006”.

“The first negative balance for the State pension system is forecast for the period between 2035 and 2040. Given this scenario, if the economy fails to grow, the overwhelming majority of current tax payers will see their pensions on the line,” he said.

The figures pointing to the future impoverishment of the social security system couldn’t be clearer. Up until 2035, receipts will outweigh expenditure. But from then on, national insurance contributions from employers and companies will be insufficient to cover pensions.

For example, in 2035, receipts will still be greater than expenditure by around 223 million Euros. But by 2040, costs will outweigh the gains by around 752 million Euros. By 2050, the Social Security system will face a 3.3 billion Euro black hole.

Historically low interest rates are also not helping the situation since the Government invests Social Security receipts placed in the Social Security Financial Security Fund (Fundo de Estabilização Financeira da Segurança Social – FEFSS).  But if interest rates don’t rise and the Portuguese economy doesn’t grow beyond two per cent, the FEFSS will have run dry by 2050.

Based on these harsh facts, Eugénio Rosa argues that “Social Security now has to rethink other ways of financing that aren’t so dependent on salaries”.

Expenses from State pensions generated from Social Security and Caixa Geral de Aposentações (CGA) between January and September of this year topped 15.2 billion Euros, an increase of 616 million Euros compared with the same period last year.

And, in the first nine months of 2010, Social Security expenditure on pensions reached 9.9 billion Euros. Since expenditure has risen 4.1 per cent compared with the same period in 2009, State pensions are costing the Portuguese Government 394 million Euros more than last year.