Agreement reached on framework for social security reform

In July 2006, the government and the social partners, with the exception of the General Confederation of Portuguese Workers, reached agreement on the principles of reforming the social security system for private sector workers. The guidelines presented will form the basis for the upcoming negotiations that aim to reach a final overall agreement on revising the social security law, which is expected to come into force in January 2007.

On 10 July 2006, after several meetings of the tripartite Standing Commission for Social Concertation (Comissão Permanente de Concertação Social, CPCS), the government, the General Workers’ Union (União Geral de Trabalhadores, UGT) and all the employer confederations represented reached agreement on the strategic principles for the next social security reform. However, the main representative trade union confederation, the General Confederation of Portuguese Workers (Confederação Geral dos Trabalhadores Portugueses, CGTP), did not sign the agreement, arguing that it will contribute to devaluing pensions.

Aims of reform measures

According to this agreement, the future reform aims to improve the financial sustainability of the social security system in order to guarantee that it will remain public and universal. In this regard, it follows the principles set out by the 2001 agreement on social security reform (PT0112112N), signed by the government and the two trade union confederations, CGTP and UGT, and by the employer confederations, with the exception of the Confederation of Portuguese Industry (Confederação da Indústria Portuguesa, CIP). The 2001 agreement introduced a major change to the social security system, namely the gradual inclusion of individual lifetime social security contributions in the calculation of retirement pensions; the government had planned to fully implement this change by 2017.

The July 2006 agreement presents new measures to deal with economic and demographic changes in Portugal, such as the rise in unemployment and the ageing population. People who currently receive a pension are not affected in terms of the value of their pensions, although it is envisaged that in the future their pensions will be updated on an annual basis, based on a formula safeguarding against inflation, particularly for those with lower pensions. The main changes addressed in the guidelines for further social security reform concern the pensioners of the future.

Proposed reform measures

The latest agreement proposes the following social security reform measures:

• introducing a sustainability adjustment factor in the calculation of future pensions in relation to life expectancy. This measure will be combined with a flexible system where it is possible to choose between: extending working life (with special incentives); increasing contributions (through individual accounts, public or private); or allowing the effect of the sustainability adjustment factor in the calculation of pensions;

• accelerating the transition to the new pension formula (taking lifetime contributions into consideration), by aiming to conclude the transition period by 2007, instead of the previous deadline of 2017;

• protecting those who have contributed throughout a long career by maintaining the option of early retirement without being penalised in terms of pension level, and providing the possibility to increase the retirement pension by making further contributions after the retirement age;

• introducing a new index reference, the so-called Indexante de Apoios Sociais (IAS), for updating and calculating social benefits, substituting the previous reference, namely the national minimum wage.

In addition, the agreement introduces a limit on higher pension levels, which would be of a transitory nature as it would not apply to the pensions calculated exclusively by the new formula.

The agreement also recommends starting a discussion on a national strategy for active ageing by the end of 2006 and revising the laws on flexibility regarding retirement and pre-retirement age.

Improving social security finances

Several structural fiscal reforms are planned in order to improve social security finances, including the transfer of some expenses and benefits (non-dependent on contributions) to the national budget that are currently part of the social security budget, such as child benefit and unemployment benefit. Furthermore, measures have been defined to combat the evasion of social security contributions and to improve debt collection.

The agreement also calls for more active measures from the National Council for Social Security (Conselho Nacional de Segurança Social, CNSS) as well as from the Consultative Committees of the national social security institutions that had not been effective so far. The executive board of CNSS will be responsible for ensuring that the agreement is fulfilled.

Final agreement planned for new year

The guidelines now approved form the basis for the upcoming negotiations that aim to reach a final overall agreement on the revision of the social security law, which is expected to come into force in January 2007.

Maria da Paz Campos Lima and Reinhard Naumann, Dinâmia