1. Pension liabilities in a context of an ageing population: the Portuguese case Workshop on Pensions OECD - ABS, Canberra 22-24 April 2013 Ana M. de Almeida Deputy-Director | Statistics Department Pension liabilities in a context of an ageing population: the Portuguese case OECD – ABS Workshop on Pensions Canberra, 22-24 April 2013

2. Pension liabilities in a context of an ageing population: the Portuguese case Workshop on Pensions OECD - ABS, Canberra 22-24 April 2013 OUTLINE 2 1. DEMOGRAPHIC OVERVIEW AT A WORLDWIDE LEVEL 2. AGEING IN EUROPE – Trends; Economic impacts 3. STYLIZED FACTS FOR PORTUGAL – Population; pension liabilities 4. SOME CONCLUSIONS

3. Pension liabilities in a context of an ageing population: the Portuguese case Workshop on Pensions OECD - ABS, Canberra 22-24 April 2013 1. DEMOGRAPHIC TRENDS at a Glance - Finance & Development, IMF, June 2011 3 Film

4. Pension liabilities in a context of an ageing population: the Portuguese case Workshop on Pensions OECD - ABS, Canberra 22-24 April 2013 1. DEMOGRAPHIC OVERVIEW AT A WORLDWIDE LEVEL – UN 4 1950 2.5 B 2000 6. 2 B 2050 9.7 B 2100 10. 9 B

5. Pension liabilities in a context of an ageing population: the Portuguese case Workshop on Pensions OECD - ABS, Canberra 22-24 April 2013 In the last decade, world total population increased from 6.1 bn (2000) to 7.0 bn (2012). Since 2011, population annual growth remains around 0.1%, approximately. World demographic trend: 2000-2012 1. DEMOGRAPHIC OVERVIEW AT A WORLDWIDE LEVEL 5

6. Pension liabilities in a context of an ageing population: the Portuguese case Workshop on Pensions OECD - ABS, Canberra 22-24 April 2013 Asia is the most populous continent. It hosts 60% of the world's population. Europe is the third-most populous continent, with 11% of the world´s population. World demographic picture: Country ranking - 2012 1. DEMOGRAPHIC OVERVIEW AT A WORLDWIDE LEVEL 6

7. Pension liabilities in a context of an ageing population: the Portuguese case Workshop on Pensions OECD - ABS, Canberra 22-24 April 2013 According to the World Bank estimates, in July 2012 the world population accounted for more than 7 billion individuals. As the worlds population grows, it is also ageing, in particular in developed countries. By 2050, the world population of those over the age of 60 is projected to triple, reaching 2 billion people. Europe has the highest proportion of older people and this will remain so for decades; more than one third of Europes population is expected to be over 60 by 2050. This requires major policy and a shift in attitudes towards age! 1. DEMOGRAPHIC OVERVIEW AT A WORLDWIDE LEVEL 7

8. Pension liabilities in a context of an ageing population: the Portuguese case Workshop on Pensions OECD - ABS, Canberra 22-24 April 2013 While the global population is rising, Europes population is proportionally diminishing. Increase in life expectancy – people live longer; Decrease of the fertility rate – having fewer children, baby-bust followed the baby boom of the post - II W War; Increasing mobility and immigration – European societies are becoming more diverse and immigrants are becoming part and parcel of them. Ageing affects European countries, with negative consequences for the economies. 2. AGEING IN EUROPE – Trends; Economic impacts 8

9. Pension liabilities in a context of an ageing population: the Portuguese case Workshop on Pensions OECD - ABS, Canberra 22-24 April 2013 2. AGEING IN EUROPE – Trends; Economic impacts Labour market: Size and composition of labour supply – the proportion of older workers increases and fewer new workers enter in the labour market. The employment rate of older workers is projected to massively increase from 47% in 2010, to the EU25, to 59% in 2025; U nder the assumption of unchanged labour productivity growth, demographic trends imply a decline in real GDP growth from its average 1995-2005 level of 2.1% to around 1% by 2050. Government budget: P ressure on government financing – ageing related expenditure ; increasing in budget deficits related to expenditures for pensions, health care, social assistance, unemployment ; According to the European Central Bank, for most euro area countries, in the absence of any reform, the demographic change will cause an increase of 3 p.p. approximately in GDP due to pension expenditures in 2050. 9

10. Pension liabilities in a context of an ageing population: the Portuguese case Workshop on Pensions OECD - ABS, Canberra 22-24 April 2013 2. AGEING IN EUROPE – Trends; Economic impacts 10 Economic and social concerns for the European economics are being discussed in the literature: Population ageing will emerge as a key trend in Western economies over the next decades. Population ageing will contribute to a reshaping of the labour force. However, it will also lead to an increase in dependency ratios (i.e., an increase in the share of retirees in overall population) and, consequently, in the average marginal propensity to consume, shifting saving/consumption decisions and having an impact in the global saving and investment balance. The ageing trend is likely to drive a protracted reduction in saving ratios in Western economies, which relied significantly on the saving for retirement by the baby-boom generation. The decline in savings will determine an increase in worldwide real interest rates, with non-negligible impacts in global investment and technical progress, limiting potential output growth.

11. Pension liabilities in a context of an ageing population: the Portuguese case Workshop on Pensions OECD - ABS, Canberra 22-24 April 2013 In addition, the ageing trend will simultaneously increase age-related public spending and narrow the tax bases, raising issues on the sustainability of public debt (ECB 2012, Merola and Sutherland). It should be highlighted that the pay-as-you-go nature of most pension systems will necessarily limit social security revenues and will increase outlays. Given the public nature of most pension systems, imbalances in the social security are a contingent claim on Government revenues, thereby playing a key role on debt sustainability. Population ageing will be even more important for European Union economies, in particular for those which are subject to a common monetary policy. A coordinated policy response would be key in fostering economic and financial stability in the euro area. 11 2. AGEING IN EUROPE – Trends; Economic impacts

12. Pension liabilities in a context of an ageing population: the Portuguese case Workshop on Pensions OECD - ABS, Canberra 22-24 April 2013 In accordance with the rest of European countries, Portuguese population is getting older: Lower fertility rates projected (2010-2060); Diminishing of the total population; Elderly population increases in the total population. 3. STYLIZED FACTS FOR PORTUGAL – Population; pension liabilities Demographic trend - Portugal 12 Macroeconomic projections – Portugal as % of GDP Portuguese ageing pressures the budgetary deficits: Old-age pensions increase; Disability and Survivors pensions stable along this period; Decrease in the public pensions contributions. Source: The 2012 Ageing Report

13. Pension liabilities in a context of an ageing population: the Portuguese case Workshop on Pensions OECD - ABS, Canberra 22-24 April 2013 Statistical data play an important role in measuring the impact of ageing for pension liabilities – a crucial tool to help policy makers! Portugal was a member country of t he Contact Group on the statistical measurement of the assets and liabilities of pension schemes in general government, which was established by the Committee of Monetary, Financial and Balance of Payments Statistics (CMFB) in 2008. In that concern some work was developed in order to evaluate the pension entitlements for the Portuguese economy. A contract between Banco de Portugal and the Research Center for Generational Contracts of the Albert- Ludwigs Universität Freiburg was signed to develop a report and an estimation for the Portuguese pension entitlements. 3. STYLIZED FACTS FOR PORTUGAL – Population; pension liabilities 13

14. Pension liabilities in a context of an ageing population: the Portuguese case Workshop on Pensions OECD - ABS, Canberra 22-24 April 2013 The model, developed in accordance with the TF/CG conclusions, aims to estimate the accrued-to- date liabilities of the base year : p resent value of pensions in disbursement; present value of future pensions due to past and current contributions of present workers : This means that in every period, the existing retirees pension benefits and the pension rights accrued until the base year, which are both discounted by the factor for every future year, are multiplied by the number of members of the age cohort. This is done for every age-group, beginning with the ones born in, which goes back 100 years prior to the base year. 3. STYLIZED FACTS FOR PORTUGAL – Population; pension liabilities 14

15. Pension liabilities in a context of an ageing population: the Portuguese case Workshop on Pensions OECD - ABS, Canberra 22-24 April 2013 Pension liabilities for Portugal 2007-2011: 3. STYLIZED FACTS FOR PORTUGAL – Population; pension liabilities 15 Portuguese pension entitlements increased between 2007-2010. In 2011, pension liabilities were about 326% of GDP. Social Security represents around 70% of the total pension liabilities.

16. Pension liabilities in a context of an ageing population: the Portuguese case Workshop on Pensions OECD - ABS, Canberra 22-24 April 2013 16 3. STYLIZED FACTS FOR PORTUGAL – Population; pension liabilities Portuguese recent reforms (2006-2008) : The inclusion of a sustainability factor in accordance with changes in the life expectancy ; Indexing rules – pensions are now linked to CPI and to the real GDP growth ; Lifetime wages (up to a maximum of 40 years) are accounted for and accrual rates are set according to the workers wages and the length of their contributory career ; Reinforcing the mechanisms for the protection of long contributory careers ; introducing a ceiling to higher pensions ; and promoting active ageing (giving bonuses to those who decide to extend their working lives beyond the legal retirement age and increasing penalties for early retirements ).

17. Pension liabilities in a context of an ageing population: the Portuguese case Workshop on Pensions OECD - ABS, Canberra 22-24 April 2013 Population data used for the estimations: Under the model used in Portugal, the starting point of the projection is the population structure by age and gender observed at the start of the respective year, the remaining projected years, fertility rates, mortality rates and life expectancy, are derived from EUROPOP projections. Population contributors and beneficiaries – broken down by type of pension (old age, survivors and disability), and reported by Social Security (SS) and Civil Servants pension scheme (CGA). 3. STYLIZED FACTS FOR PORTUGAL – Population; pension liabilities 17

18. Pension liabilities in a context of an ageing population: the Portuguese case Workshop on Pensions OECD - ABS, Canberra 22-24 April 2013 3. STYLIZED FACTS FOR PORTUGAL – Population; pension liabilities Pension profile of SS and CGA, Average benefit per participant (2011, in EUR) The calculation suggests a drop of benefits for cohorts aged 65 and older. 18

19. Pension liabilities in a context of an ageing population: the Portuguese case Workshop on Pensions OECD - ABS, Canberra 22-24 April 2013 Population projection for Portugal (2010-2060) EUROPOP 2010 3. STYLIZED FACTS FOR PORTUGAL – Population; pension liabilities 19 Film

20. Pension liabilities in a context of an ageing population: the Portuguese case Workshop on Pensions OECD - ABS, Canberra 22-24 April 2013 As in most European countries, Portugal faces the challenge of an ageing society which pressures, from a long term perspective, the Portuguese pension system: Decrease of total population (trend projected 2010-2060); Increase in the old dependency ratio ; Increase in the life expectancy ; Decrease of the fertility rates ; Increase of the number of pensioners and total amount of benefits ; Decrease in the proportion of active people and total amount of contributions. 20 4. MAIN CONCLUSIONS

21. Pension liabilities in a context of an ageing population: the Portuguese case Workshop on Pensions OECD - ABS, Canberra 22-24 April 2013. In the last years Portuguese governments took some reforms (especially between 2002 and 2006 ); Countries should be aware of the consequences, namely the impact on pension liabilities and develop effective policies to promote a sustainable social security system;. Statistical data is a fundamental tool to provide a picture of the state of the art and the development of models to estimate pension liabilities is a useful tool. 4. MAIN CONCLUSIONS The challenge is to ensure that the demographic trends promote sustainable economic growth, ensure international security and allow for the values of democracy and human rights. 21

22. Pension liabilities in a context of an ageing population: the Portuguese case Workshop on Pensions OECD - ABS, Canberra 22-24 April 2013 Thank You for your attention ! Any questions? Ana M. de Almeida ammalmeida@bportugal.pt 22