Overview of the portuguese three pillar pension system

In order to cope with alleged future financial problems, several changes were made to the design of the Portuguese pension system since 2000. The aim was to achieve the diversification of retirement income sources across providers, public and private, across the three pillars, public, industry-wide, and personal, and across financing forms, pay-as-you-go and funded. This paper describes those changes and analyses the results mainly as concerns the weight of each pillar and the investment performance of both public pension reserves and private pension funds.

Mandatory pensions are usually justified through behavioral dimensions. Indeed, myopic behavior is seen as a failure of an adequate description of individual consistent, rational choice, on which the life-cycle model is based (Ando and Modigliani, 1963). Therefore, given the several present constraints, such as the ageing process, the economic growth rate and the financial crisis, the (re)design of pension systems should address those dimensions and long term horizons. Too many changes in a very short period strains the system and does not solve the alleged financial sustainability problem. Instead, they will probably raise more problems many of which are related to an inappropriate level of retirement income. Twenty years have passed since the World Bank Policy Research Report of 1994 was released advocating a multipillar system (World Bank, 1994) to avert old age crisis. In the meanwhile, much has been debated and several reforms have been enacted throughout the world. In addition, economic growth slowdown and financial crisis add to an aging society and together seem to lead to an unavoidable diminishing role of the public pension system. However, this determinism in the way of analyzing things is not so unanimous anymore and the need to go back to the basics and fundamentals of the social security system is prominent. Furthermore, solid and sound management of the pension system is a necessary condition to its sustainability (Plamondon et al., 2002).