A study shows that, alternatively, it is necessary to reduce the value of future pensions by 19% or increase the retirement age. However, neither of these are considered viable options.
In order to restore the sustainability of public accounts to 2017 levels, it is necessary to raise taxes or significantly reduce the value of future pensions. This warning appeared in the “Public Finance: Intergenerational Perspective” research promoted by the Calouste Gulbenkian Foundation.
Francesco Franco, Thiago Bernardino and Luis Terras Morais prepared a research report that took into account the population dynamics of Portugal in the coming years. Under the premise of changing the budget age, the restoration of sustainability will require a 22% increase in income.” This is not a temporary effect. This group of authors acknowledged that “this is a very large adjustment” and pointed out that “22% of tax and social contribution income in 2017 is equivalent to close to 16 billion euros-this figure represents that the additional amount of tax and social contribution must be indefinite every year To collect.”
“From an accounting point of view, this figure provides a measure that is equivalent to the adjustments required to adjust the accounts from a long-term perspective, taking into account the expected population dynamics and the current welfare and tax system by age group” NOVA SBE The economist Francesco Franco explained.
An increase in income will mean an increase in the tax burden by eight percentage points. This group of authors concluded: “The global tax burden, including social contribution, will increase from 37% of GDP to nearly 45%” and show that “the current tax and benefit age distribution is structurally inconsistent with projected fertility and life expectancy. “
For those born after 2017, the contribution is even greater. “In order to ensure the sustainability of the budget, the income of people born after 2017 should be 57% higher than that of the year.” Moreover, “children and grandchildren must cut spending by about half.”
The study measured “the structural impact of demographic changes on public finances, and made necessary adjustments to expenditures and income distribution for age groups to ensure long-term budget balance”, but did not consider “changes in age groups.” “The income and expenditure status implied by the policies adopted”, therefore, it does not give a strict forecast of the future sustainability of public accounts.
The study said: “Another option to restore sustainability may be to reduce the value of future pensions, but this would mean a 19% reduction.” He explained that the difference in adjustment is made up of the age of income and expenditure. They said: “As the population ages, more and more people receive pensions and survivors’ pensions, which means that the relative adjustment in expenditure is lower than the relative adjustment in income (tax).”
But the authors themselves admit that these proposals are not feasible in terms of the sacrifice of one proposal and another.
However, in order for it to play a positive role, it is necessary to increase the “retirement age five times” from 2036 to 76 years old. This group of authors concluded: “Not only can this eliminate imbalances, but it may also be an unrealistic alternative policy.”
Economist Ricardo Reis concluded: “In terms of numbers, the increase in the retirement age is not that much.” A professor at the London School of Economics admitted: “Portugal has carried out a successful reform, which will retire. Age is linked to certain sustainability indicators of social security. This is a wise reform.” However, the economists who reviewed the study concluded that for many countries, the solution “solves the sustainability of public accounts. There are many problems with sex, then this study shows that this is not true for Portugal.”
Immigration will not help
One of the solutions aimed at mitigating the effects of rapid population aging and population decline may also include immigration, attracting working-age people with the ability to work. But this seems to be a limited option in terms of the future sustainability of public accounts, which surprised Francesco Franco again.
The economist and co-author admitted: “I thought I could provide a lot of help, but after using the model, these people will have the same life expectancy as the Portuguese, and the fertility level will be the same as the Portuguese. They will eventually become Portuguese.” the study. He said: “In the beginning, this kind of movement helped the sustainability of the account, but then it increased the number of people entering retirement age.”
The study stated: “In the case of high immigration (multiplied by two), income increases in the medium term (at a level of 30 years), but it is not enough to offset the higher costs caused by aging.”