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a blog from young economists at Nova SBE

Social Security Reform

The Portuguese Social Security program “is a system that seeks to assure the basic human rights and equal opportunities to all citizens that live inside a country’s boarder, while promoting social welfare and social cohesion”(i). Nowadays, the system faces a bundle of limitations and rigidities that make it inefficient. Additionally, the inter-generational sustainability of the system is not assured – the population has aged, life expectancy has risen and birth rates have fallen. Thus, the number of beneficiaries became absurdly large when compared to the number of workers paying taxes to fund the system(ii). This problem affects most EU countries, where systems are designed in such a way that they do not increase benefits for additional years of work , which led to a mass migration from the labour force by older workers.
As a consequence, several reform solutions are being discussed throughout Europe and Portugal is no exception.
One of the options mentioned is the (partial) privatization of the system, by imposing a wage ceiling for compulsory contributions. In this fashion, the worker would only pay compulsory contributions if he earns below a certain wage up-limit. Beyond these limits, the contributor is free to choose between the public sector and the private sector, where individuals can invest their money in individually controlled accounts and receive it with interest when they retire.(iii) The system seems simple but it is interesting to analyse its pros and cons.
In the first place, this system would be funded through individual savings. As savings go up, investment should go up and thereby capital stock would also go up. But does this necessarily imply a more competitive economy in the future? It ultimately depends on where the Money is invested really. Most right wing parties argue that for this to be true it’s crucial that the capitalization occurs in a decentralized way, through individual accounts offered by firms operating in a competitive market.(iv)
Secondly, by being given the possibility of choosing where to invest their money, people’s welfare would possibly increase. Traditional Social Security, forces individuals to invest in the same way leading to potential reductions on welfare, since it does not respect consumers’ sovereignty.
Let’s now turn to the downsides. To start off, this system has a high risk of migration by wealthier individuals from the Social Security system, as they would no longer be required to make contributions, retaining only lower income people. In Fact, from the moment when there is a ceiling for the contributions to the public sector, Social Security can lose up to 16 billion euros in 30 years .(v) Hence, if the system gets privatized, either we have an increase on taxation to the current generations or huge Social Security deficits because we still have to support the existing generation of retirees and the upcoming one.
Finally, in this context it is important to notice that portuguese private pension funds offer some of the worse return rates on the Euro Zone. In fact, these rates are around -2,4%, while the mean rate of return in the OECD countries is around 3.5%.(vi) It is obviously impossible to predict the return on any investment made, as any investment bears some risk and uncertainty, but these values are quite daunting.

(i)Segurança Social – Institucional Website: http://www4.seg-social.pt/
(ii)Banco de Portugal Institucional Website: https://www.bportugal.pt/pt-PT/Estatisticas/Paginas/default.aspx
(iii)Público, (April 2011): http://www.publico.pt/economia/noticia/ps-acusa-psd-de-avancar-com-propostas-perigosas-e-irresponsaveis-de-privatizacao-da-seguranca-social_1490509
(iv)André Azevedo Alves, “Privatizar a Segurança Social (III)”, Causa Liberal (blog)(March 2003): http://www.causaliberal.net/home/artigos/andre-azevedo-alves/privatizar-a-seguranca-social-iii-resposta-a-algumas-das-objeccoes-levantadas-a-solucao-de-privatizacao-da-seguranca-social-por-andre-azevedo-alves
(v)Eugénio Rosa, “A ignorância e a mentira na campanha de manipulação da opinião pública contra a Segurança Social”: http://www.eugeniorosa.com/Sites/eugeniorosa.com/Documentos/2014/7-2014-sustentabilidadeSS.pdf
(vi)Tapia, W. (2008), “Comparing Aggregate Investment Returns in Privately Managed Pension Funds: An Initial Assessment”, OECD Working Papers on Insurance and Private Pensions, nº. 21, OECD publishing)

David Dias Pissarra – Economics

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Author: studentnovasbe

Master student in Nova Sbe

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