Social security reform proposals under debate

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In May 1998, the Portuguese Government announced proposals for a new basic law on social security, containing structural measures designed to strengthen system and address its financial sustainability. The proposals incorporate some recommendations arising from the dialogue between the Government and the social partners.

Portugal, in comparison with other countries which will be involved in EU Economic and Monetary Union (EMU), spends a low percentage of its GDP on social security - 19.5% in 1994 against an EU 12 average of 28.5% (see "Social protection in the European Union", Statistics in focus: Population and social conditions, 3/97, Eurostat). The share of financing for social security programmes that comes from employer and employee contributions was 53.2% (the EU average was 58.0%), and public contributions totalled 37.4% (EU average - 30.2%). Social security and healthcare programmes were the largest items of expenditure, taking up 47.9% of the total social security budget (EU average - 35.2%) followed by old-age programmes with 40.1% (EU average - 44.2%). Unemployment measures and programmes to promote employment, doubled their outlay between 1980 and 1994, when they represented 5.8% of the total (EU average - 9.2%)

The proportion of economic resources dedicated to social security has been on the rise in Portugal, while, at the same time, there have been changes resulting in even greater needs for social protection (demographic and labour market pressures). There have also been changes in legislation relating to social security. Discussions over the financial sustainability of the system have begun to emerge alongside concerns about solidarity and equity.

Government proposal for social security reform

The debate on the social security system became more intense in late 1996 and early 1997, beginning with the release of Green and White Papers on social security. Then, in March 1998, the Government proposed a series of structural reforms of the social security, healthcare, education, justice, and government administration systems, suggesting to the opposition parties a "socio-political" agreement in the areas of social security and healthcare. In May 1998 a proposal was announced for a new basic law on social security. In contains structural measures designed to strengthen social security and address the financial sustainability of the system. The main points of the proposal are:

  • a new model of sources of financing, with greater participation on the part of the state and diversification of the system of contributions. The system is still very reliant on employee and employer contributions, according to the Minister of Labour and Solidarity, and attempts must be made to diversify sources of funding. One way of diversifying sources would be to vary social security contributions in order to reduce non-wage labour costs for companies involved in highly labour-intensive activities. This would be counter-balanced by state contributions raised by taxation (by means of a "solidarity contribution");
  • the creation of an earnings ceiling for social security contributions, above which those who have higher incomes are free to opt for a private or public social security scheme of their choosing (for example, optional public insurance); and
  • the flexibilisation of the legal retirement age.

For the Government, the proposed law reform aims to ensure the principles of solidarity and thus guarantee: equal opportunities; universal coverage with positive differentiation; links between public and individual responsibilities; and a close collaboration between social security and employment and training policy.

Social security reform and social dialogue

The 1996-9 tripartite Strategic Concertation Pact signed in December 1996 by the General Workers' Union (União Geral de Trabalhadores, UGT), the Confederation of Portuguese Industry (Confederação da Indústria Portuguesa, CIP) and the Confederation of Portuguese Commerce (Confederação do Comércio e Serviços de Portugal, CCP) had already considered the issues of social security reform that are now under discussion. Thus, the UGT. for example, has been involved in the current debate while simultaneously implementing measures outlined in the Strategic Concertation Pact. In its new initiative, the Government refers to compliance with compromises made in course of the concertation process with the social partners, with regard to: making retirement age and pension levels more flexible; adapting the social security system to new models of work organisation; revising unemployment benefit; and creating incentives to strengthen supplementary social security mechanisms, particularly through collective bargaining. The demand for the creation of a wages guarantee fund is also being studied.

Issues in the debate and social partners' positions

The main issues under debate have been reform of financing of the social security system, especially with regard to those programmes that rely on employee contributions, and types of protection.

The two main union confederations, the General Confederation of Portuguese Workers (Confederação Geral dos Trabalhadores Portugueses, CGTP) and the UGT, are in agreement on some points, especially their belief that the system should remain universal, covering the entire working population, and publicly based. They reject the idea of a "minimum" social security system, with contributions not levied on earnings over a certain limit (the proposed monthly ceiling is PTE 300,000). As for the social security financing system, the alternatives must be carefully studied because, for example, the creation of a solidarity contribution through taxation on all types of income would not be the ideal solution, since this would translate into an increased tax burden for workers. Reform of social security and urgent fiscal reform must go hand in hand.

The UGT considers talk about imminent financial collapse of the social security system to be alarmist. It accepts the need for discussion of indirect labour costs (social security contributions), considering that Portugal competes with countries where these costs are limited. The UGT supports gradual reform which will bring about financial sustainability and gradual improvement in income, and especially improvement of minimum pensions.

The UGT considers that shortfalls in non-contributive or weakened parts of the system should be paid out of the state budget. Widening the scope of supplementary social security schemes can be encouraged through fiscal means. Any levelling of social security should not be downwards and future harmonisation efforts must honour all previously acquired rights. With regard to the management of the social security system, the UGT recommends that the social partners continue to participate and play an active part, though the state should continue to have an important role as well.

The CGTP, on the other hand, draws a pessimistic analysis of systems of complementary social security contributions and demands clarification regarding the benefits of pension funds, given the unpredictability and instability of supplementary pensions which depend directly on the returns on financial investments. The CGTP consider that such schemes favour the private interests of insurance companies and banks. It takes a dim view of the management of supplementary retirement pensions offered by companies, about which workers are often not kept informed, pointing out examples of companies that have had supplementary pensions that have gradually been sold off through negotiation (CTT, QUIMIGAL and ABB). The CGTP calls for a strengthening of the Capital Investment Fund, parity between the minimum retirement pension and the minimum wage, and changes in the way time is counted toward retirement (taking into account years of service and type of occupation, rather than age).

The CGTP does not approve of all the proposed options for the use of social security funds. Incentives for companies to create jobs and the creation of a partial unemployment compensation allows employers to take advantage of cheaper labour and does not help to increase the number of jobs, since these measures tend to favour an increase in part-time work (labour lawn reforms dealing with this subject are taking place). It would be preferable to reduce the working week to 35 hours. For CGTP, social security would be transformed into a sliding scale system based on family income, which jeopardises the universality and solidarity of the system.

On the part of the employers, arguably the most noteworthy position comes from the Association of Porto Industry (Associação da Indústria Portuense, AIPortuense and the Association of Young Business People (Associação Nacional de Jovens Empresários, ANJE). Although they agree basically with the changes in the social security contributions, they are concerned that these changes could lead to some imbalances, whether with regard to the variation of contributions in line with the number of workers, thereby disadvantaging smaller companies, or through the choice of criteria for diversification of contributions. The criteria for diversification should not allow companies, over time to replace workers with machines (in order to take advantage of lower rates), which would reduce productivity and lead to imbalances in the labour market. In order to increase employment, it would be preferable to change the regulations that interfere with recruitment of workers, such as what are seen as over-rigid labour regulations, and excessive social protection of less-qualified employees.

Commentary

The Government has presented proposals to make changes to the system with an eye towards preparing the social security system for possible future financial crises. The nature of the issue is not only budgetary but also political and social, which explains the heavy involvement of the social partners in the debate. The Portuguese model of social security is a mixed model based primarily on employment, but it also includes non-contributory elements. As we have seen, it is fragmented and there are major gaps in social protection. Healthcare plays an important part in social security.

In Europe at the moment, reducing labour costs is being increasingly seriously contemplated. In this area, social security in Portugal lags behind the rest of the EU. The unions have reacted negatively towards both the decrease in employer contributions that is currently underway and the role of social protection in responding to labour market problems when this means a reduction in employers' responsibilities or in subsidies to companies (PT9805177F).(Maria Luisa Cristovam, UAL)

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