According to an article published in Jornal de Negócios dated from April 30th 2012, the Portuguese Social Security Fund (FSS) became able to invest the contributors money on stocks whatever the risk they carry, during the external assistance program. (i)
The Social Security system in Portugal, as in most western countries, faces a bundle of limitations and rigidities that make it inefficient. Additionally, because life expectancy has risen and birth rates have fallen, the population has aged and thus, the inter-temporal sustainability of the system is threatened.
Consequently, the Portuguese government created the Social Security Fiscal Stability Fund (FEFSS) which essentially seeks to assure the payment of the pensions (and subsidies) to beneficiaries if the system enters in permanent deficit, which is predicted to occur in the 30’s of this century.(ii) But where does the FEFSS money comes from?
Firstly, it is important to clarify that the Portuguese Social Security system is a superavitary fund, despite some of the misleading news we hear.(iii) After the payment of the pensions, the remaining money from the contributuions (between 2 to 4% of the contributions) – the superavit – would go to a capitalization fund – the FEFSS – which objective was mentioned above.
Although the FEFSS should be financed through transferences from employers and employees, these payments were suspended due to the current economic conditions, which is in fact a situation predicted in the article that regulates the functioning of FEFSS.(iv)
Hence, the evolution of the amount of Money available in this fund depends mostly on the evolution of the markets.
There were restrictions to the share of money that could be invested in each asset, for instance, a minimum of 50% should be invested in government bonds (public debt) and a maximum of 40% can be invested in private debt rated above BBB-. According to the article stated in the beginning, the government loosen the constraint that stated that the asset should be above the BBB- .
In 2012, the fund appreciated 23.32%, mostly due to the good performance of government bonds – this component increased its value by 41.06% and represented 54.73% of the total investment. (v)
Hence, in July the 3rd 2013, Vitor Gaspar recommended that 90% of the fund should be transferred to government bonds. “In the current conditions, the public debt markets in the OECD are particularly depressed, which results in lower profitability of the FEFSS (…) Hence, the FEFSS should transfer the money currently on these assets to Portuguese public treasury bonds”, says a government representative. (vi)
This goes a bit against Investment Theory, which tells us that our portfolio of investments should be as diversified as possible, ie, spread among several assets. No financial adviser would recommend us to have the majority of our wealth invest in only one asset. In fact, although stocks carry a higher short-run risk than bonds, they also provide a higher long run return and when we talk about retirement plans it’s exactly the long run that we are considering! The decision of the ex-minister was based on the good performance of the government bonds in the previous years, but was it the most adequate? It is indeed quite arguable!
All in all, the government is basically seeking for an optimal investment plan for the contributions money in the private market – this is a perfect example that we do not need to go private (Social Security Privatization) because the Government can also act like a private agent by investing in the private market.
(i) Jornal de Negócios – “FSS vai poder investir na banca independentemente do risco”
(ii) Social Security Sustainability Report
(iii) Banco de Portugal – BPStat
(iv) Artigo 91º da Lei nº 4/2007 de 16 de Janeiro
(v) Relatório de Atividade e Contas FEFSS 2012
(vi) tvi24 – Pensões: FEFSS pode investir até 90% em dívida portuguesa”
David Dias Pissarra