New legislation provides for increase in pension entitlements

On 30 November 2006, the government issued a new directive (No. 1357-A/2006) updating the pension regulations concerning disability, occupational disease, old age and survivor’s benefit. As a result, new pension rules came into force on 1 January 2007. The criteria for updating pensions took into consideration the new scheme included in the draft bill on social security reform that was being discussed in parliament. Under this scheme, pensions are calculated in relation to a new index independent of the minimum wage, and their increase is based on the observed inflation rate rather than on the future expected inflation rate. On 14 December 2006, the new Law on Social Security (Law No.4/2007) was approved in parliament and it came into force on 17 January 2007.

New law regulating pension updates

On 10 October 2006, the Agreement on Social Security Reform (Acordo sobre a Reforma da Segurança Social (in Portuguese, 156Kb PDF)) was signed by all of the social partners with the exception of the General Confederation of Portuguese Workers (Confederação Geral dos Trabalhadores Portugueses, CGTP) (PT0608019I). Following this new agreement, two main regulations have been issued to change the previous legal framework on social security: Directive No. 1357-A/2006 and the Law on Social Security (Law No.4/2007).

Defining conditions for updating pensions

On 30 November 2006, the government issued Directive No. 1357-A/2006, which defines the conditions for updating pensions related to disability, occupational disease, old age and survivor’s benefit. As a result, new pension rules came into effect on 1 January 2007. The directive establishes that pensions related to disability and old age which started before 1994 will increase by 3.1% if they are below or equal to €596.79. However, the increase is lower for pensions above that level. Moreover, pensions with a value of €4,774.32 or higher will not be increased.

The criteria for updating pensions took into consideration the new scheme included in the draft bill regarding social security reform, which was being discussed in parliament. The new scheme is an innovation insofar as the pensions are calculated in relation to a new index (Indexante de apoios Sociais, IAS) that is independent of the minimum wage. Furthermore, pension increases are based on the observed inflation rate rather than on the future expected inflation rate, as was previously the case.

Reaction of trade unions

Prior to this, on 20 November 2006, the General Workers’ Union (União Geral de Trabalhadores, UGT) expressed agreement with the government’s proposal to remove the link between pension reform and the minimum wage. According to UGT, the minimum wage increase should be based on economic and social criteria and not on budgetary factors. However, UGT criticised the government’s proposal on the grounds that it did not respect the tripartite commitment, particularly in relation to the revision every five years of the rules for updating pensions, such as those relating to purchasing power and intergenerational equity.

Moreover, on 30 November 2006, CGTP criticised the government for including the new indexation rules in Directive No. 1357-A/2006. The confederation argued that the indexation rules were part of the draft bill for social security reform, which was still being discussed in parliament, and should be implemented only after its final approval. However, CGTP agreed with the new rule included in the directive for updating pensions: to take into consideration the real inflation rate rather than the future expected inflation rate.

Parliament approves social security law

Furthermore, on 14 December 2006, the socialist majority in parliament approved, against all of the opposition parties, Law No. 4/2007 (Lei de bases da segurança social (in Portuguese)), which establishes the general basis of the social security system. The President of Portugal, Aníbal Cavaco Silva, issued the law, which was published on 16 January 2007 and came into force the following day.

However, as Law No. 4/2007 still needs specific regulations, the previous rules launched by Law No. 32/2002 (PT0207103N) are still in force with the exception of the increase in the minimum value of pensions, which was updated in line with the new rules (defined by Directive No. 1357-A/2006) in force since 1 January 2007.

Aiming to improve the financial sustainability of the social security system, the new law on social security, due to come into force in 2008, includes a sustainability adjustment factor for the calculation of future pensions, which is based on the individual period of social security contributions. This adjustment factor is based on the relationship between the average life expectancy observed in a defined reference year and the average life expectancy observed one year before the due date of the pension.

Maria da Paz Campos Lima and Reinhard Naumann, Dinâmia