Portuguese pensions in the balance: public policy options on adequacy and financial sustainability using dynamic microsimulation modelling

Abstract

Prompted by an ageing population and slower GDP growth, Portugal made a series of pension reforms from 1999 to 2007, in line with the concern shared by most OECD countries regarding the financial sustainability of the pension system. However, after the 2008 Financial Crisis, Portugal entered an 'Economic and Financial Adjustment Programme' (EFAP) from 2011 to 2014. This led to short to medium-term fiscal consolidation goals, including cuts in pensions entitlements. The omission of the long-term distributional perspective regarding the impact of the pension policy measures was particularly salient. This is the primary motivation and theme of this thesis.

After reviewing the challenges regarding pension systems, and the European Commission's (EC) perspective on pension reform, the research presents the Portuguese case, evidencing its frequent recalibration from 1999 to 2019 and the associated (unanswered) research questions about their long-run impact on pension adequacy dimensions: poverty, income security and inequality.

The research will address the long-term prospects of the Portuguese public social security old-age pension regarding financial and fiscal sustainability and pension adequacy. The study aims at contributing to a better understanding of the effects of the regressive pension accrual rate, the current pension updating mechanism and the sustainability factor by simulating the reversal or significant change of those measures from 2025 onwards and comparing with a baseline projection with the 2019 rules and no further policy change.

The research work contributed to the design and creation of DYNAPOR, a dynamic microsimulation model designed for long-term distributional analysis of policy options in Portugal. Following the lessons from a literature review, the model uses an open-source platform and was developed from the Belgium MIDAS, working towards a sharable and comparative approach by using the European Union Statistics on Income and Living Conditions as a data source for the base dataset and the demographic, labour market and macroeconomic projections made by the Ageing Working Group of the EC for the parameters and alignment.

In line with other studies, the research concludes that the ageing population leaves the Portuguese pension system under financial and fiscal pressure, which will be especially acute in the next three decades, with Social Security Financial Stabilization Fund playing an important role. Regarding pension adequacy indicators, the prospects are not always linear and require a refined composition analysis. Income security, inequality and poverty may experience some deterioration but are sensitive to the evolution of productivity, GDP and salaries (and their distribution). While Portugal compares well within the EU in various pension analysis perspectives, a more cycle-shaped macroeconomic scenario would be required to fully assess the dynamic of the pension system prospectively, which could be complemented with further study possibilities that are identified.

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Identifiers

ORCID for Rui Nicola: orcid.org/0009-0001-9951-8656

ORCID for Maria Evandrou: orcid.org/0000-0002-2115-9358

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