Pensions for future retirees in Portugal may represent a much smaller part of labor income. The projection does not mean that pensions will necessarily fall in euros, but it indicates that they could lose weight when compared to salaries.
According to Portugal’s fact sheet, the European Commission and the Economic Policy Committee, the gross replacement rate upon entry into the reform of contributory public old-age pensions could increase from 69.4% in 2022 to 38.5% in 2050, in a scenario of invariant policies.
These numbers were also highlighted by DECO PROteste and ECO. Even so, reading requires caution: it is an average indicator used in macroeconomic projections, and not a direct prediction of each worker’s individual retirement.
What does this rate mean
The replacement rate generally measures the relationship between the pension and income before retirement. In simple terms, it indicates that part of the income from work is replaced by the pension when the person leaves working life. But, in the case of the Aging Report 2024, the indicator must be read with caution. Portugal’s own fact sheet explains that the rate results from the comparison between the average pension and the average gross salary used in the projection for the economy as a whole, not necessarily the last individual salary of each worker.
If the indicator is 69.4%, it means that retirement represents, on average, close to seven tenths of the salary considered in the projection. If it drops to 38.5%, retirement will cover just over a third of this reference income. This difference helps to understand why the topic worries experts, workers and future retirees. Not only is the absolute value of the pension at stake, but the ability to maintain a standard of living close to that which existed before retirement.
Pensions may rise, but fall behind
The predicted drop does not mean that retirees will receive less in nominal terms. The projected scenario is different: pensions may increase over the years, but salaries may grow at a faster rate.
When this happens, the average pension lags behind the average salary. In practice, future retirees may receive more reais than current retirees, but this amount represents a smaller part of the income they had while working. It is this mismatch that explains the projected drop in the replacement rate. Retirement will continue to exist, but it may be less sufficient to replace the salary.
There is, however, an important nuance. The Aging Report’s projection is not linear: according to the Portuguese fact sheet table, the indicator first rises to 79.9% in 2030 and 90.1% in 2040, before falling to 38.5% in 2050. The fact sheet itself associates this evolution with the transition between regimes, including the decreasing weight of new Caixa Geral de Aposentações pensions.
Portugal faces demographic pressure
Evolution is linked to the aging of the population. In the coming decades, Portugal will have more people of retirement age and less active population in proportion, which increases the pressure on the public pension system. According to Portugal’s Aging Report 2024, the population is expected to fall from around 10.4 million in 2022 to almost 9 million in 2070. The elderly dependency ratio, which compares the population aged 65 or over with the population aged 20 to 64, is expected to rise from 40.7 in 2022 to 68.6 in 2050.
The arrival of numerous generations into retirement, the increase in life expectancy and the low birth rate make the balance of the system more demanding. There will be more pensions to pay over a longer period of time, in a context in which the number of contributors may not grow at the same pace. This is one of the main challenges identified in European projections. The problem is not exclusive to Portugal, but the country has significant pressure on the future sufficiency of pensions.
The expense will also weigh
The apparent contradiction is that future pensions may become less generous relative to salaries, at the same time that public expenditure on pensions continues to put pressure on state accounts for several years.
GPEARI, a body within the Ministry of Finance that released the national Aging Report, says that pension expenditure in Portugal is expected to increase until the mid-2040s, before retreating later in the projection horizon.
Specifically, according to GPEARI, pension expenditure is expected to increase by 2.9 percentage points of GDP until 2046 and decrease by 4.7 percentage points in the following period. This means that the system may require greater financial effort from the State for several years, even if the average pension loses weight when compared to salaries.
Not everyone will be affected the same way
The replacement rate is not the same for all workers. It depends on the contribution career, declared salaries, retirement age, the rules in force and any penalties or bonuses applied.
Workers with long contributory careers and stable salaries tend to have a different situation from those who had periods of unemployment, precarious employment or lower pay during part of their working lives. Higher salaries also tend to have a lower replacement rate, because the public pension does not automatically replicate the last income from work.
There is yet another point to be taken into account. The Pension Adequacy Report 2024, also from the European Commission, uses model cases to assess the future adequacy of pensions and presents a different reading to that of the Aging Report, precisely because it is more focused on pensioners’ income and not just on budgetary sustainability. Therefore, the 38.5% should be read as a macroeconomic warning, not as an individual sentence.
What does this change for those who still work
For those who are still far from retirement, these projections act as a warning. The public pension will continue to be central to the social protection system, but it may not, on its own, guarantee the same earning capacity that many workers expect.
Therefore, the debate about supplementary savings, Retirement Savings Plans, financial literacy and stability of contributory careers should gain weight in the coming years. Still, the answer is not the same for everyone. Those with lower incomes may have little room to save, which makes strengthening the sufficiency of public pensions a particularly sensitive social and political issue.
2050 is the highlighted date
The projection that points to a change from 69.4% to 38.5% has a horizon of 2050. Until then, the scenario may change if there are changes in Social Security rules, productivity, wages, immigration, birth rates or the effective retirement age.
Projections are not a closed sentence, but they help to anticipate trends. And the trend pointed out for Portugal is clear: future retirements may represent a smaller share of working-age wages. In essence, the question is not just knowing how much you will receive in retirement. It is about understanding how much this amount will allow you to maintain in relation to the income you had before you stopped working.
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