On September 16, a new law entered into force that affects contributions to the pay-as-you-go social security system. This new law, which will be implemented gradually starting January 1, 2010, consolidates multiple laws for different groups of workers and changes the contribution rates for certain groups of workers. At the same time, the law expands the definition of gross earnings to include commissions and fringe benefits such as transportation costs, profit sharing, life insurance, and employer contributions to pension funds and retirement savings plans.

Under the new law, the contribution rates for many employees and employers will remain the same: 11 percent of gross earnings for employees and 23.75 percent for employers. These contributions finance old-age, survivors, and disability insurance (OASDI), sickness and maternity insurance, unemployment compensation, and family allowances. (About two-thirds of the combined total finances OASDI). In addition, to encourage more permanent jobs in the labor force, employers who provide indefinite contracts for their employees will pay 1 percentage-point less in contributions, and those providing fixed-term contracts will pay 3 percentage-points more.

The new law also encourages the employment of older and disabled workers. For workers aged 65 or older with at least 40 years of contributions, the rates are reduced to 8 percent and 17.3 percent of gross earnings for employees and employers, respectively. Additionally, for disabled workers with less than 80 percent of normal working capacity, the employer rate is decreased to 11.9 percent of gross earnings, and the employee's rate remains at 11 percent.

Portugal's public pension system provides a retirement benefit to men and women at age 65 with at least 15 years of contributions. A new benefit formula introduced a sustainability factor in 2007, which links initial benefits to average life expectancy. Until 2017, benefits may be calculated according to the "old" formula (the 10 best of the last 15 years of earnings), average-adjusted lifetime earnings, or a combination of the two, whichever is greater. Beginning in 2017, all new pensions will be based on average-adjusted lifetime earnings. Since 2008 pensions are indexed to changes in the consumer price index (CPI) plus growth in the country's gross domestic product. Previously, the adjustment was based on the national minimum wage, which is adjusted to changes in the CPI.

This article was extracted from the United States Social Security Administration publication International Update, November 2009.

Source: "Portugal," International Update, U.S. Social Security Administration, February 2007; Social Security Programs throughout the World: Europe, 2008; "Portugal: Summary of Social Security and Private Employee Benefits, 2008," International Group Programs; Lei n.^o 110/2009, de 16 de September.

Legislation date: 09.2009

Implementation date: 01.2010