IMF “urges Portugal to revise lowest pensions and widow/ widower pensions”

In a chilling exclusive today, Expresso claims that the International Monetary Fund (IMF)  is urging Portugal to reduce the lowest pensions, and widows/ widower pensions, suggesting the former are “overly generous”, and the latter “too permissive by European standards”.

According to the paper, the IMF broadly endorses reforms proposed in Portugal’s Social Security Green Book, it says, while adding four recommendations of its own “aimed at improving the long-term sustainability of the pension system”.

The organisation praised proposals to overhaul early retirement rules, revise annual pension indexation, increase flexibility in managing the pension reserve fund and review the Solidarity Supplement for the Elderly (CSI). However, it criticised the idea of introducing a levy on highly automated businesses, often referred to as a “robot tax”, citing administrative costs, avoidance risks and volatile revenues.

One of the IMF’s key recommendations is to revise the pension calculation formula. Currently, lower pensions benefit from enhanced accrual rates of between 2% and 2.3%, meaning workers with lower contributions can receive proportionally higher pensions than those who contributed more.

The IMF argues that a universal 2% accrual rate should apply to all pensions and notes that Portugal already has one of Europe’s highest pension accrual rates, compared with an EU average of around 1.7%. The fund also highlighted Portugal’s relatively generous pension replacement rates — the proportion of salary replaced by a pension after retirement.

While such a reform would reduce future pension payouts, the IMF argues that poorer pensioners could be protected through the CSI.

The fund also singled out widows/ widowers’ pensions, say they too should be reformed. Under current rules, anyone widowed after the age of 35 is entitled to a lifetime pension. According to IMF calculations, widows and widowers retain, on average, around 80% of the household income they had before their partner’s death, says Expresso. (This is actually not correct, the percentage is 60%.)

But working on its figures, the IMF described the system as costly and unusually generous, noting that these pensions account for 1.9% of GDP – the third-highest level in the European Union.

The institution suggests either raising the age threshold for lifetime eligibility, or making payments dependent on household income.

The organisation also wants annual pension increases linked more closely to inflation – arguing that the current formula is overly complex and can produce unpredictable outcomes.

Expresso adds that the recommendations come just days before economist Jorge Bravo is due to submit a separate pension reform study commissioned by Labour Minister Rosário Palma Ramalho. “What he will do with it and with the IMF proposals, in an unstable parliamentary context and after a heavy defeat over the Labour Code, remains an open question”, the paper concludes.

Source material: Expresso

Natasha Donn

Journalist for the Portugal Resident.