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Global Aging 2016: Portugal's Aging Population Adds to the Sovereign's Budgetary Challenge

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Global Aging 2016: Portugal's Aging Population Adds to the Sovereign's Budgetary Challenge

Portugal's declining working-age population and growing numbers of pensioners will likely put increasing pressure on economic growth and public finances over the coming decades without further policy measures to stem age-related spending. Long-term population projections suggest the old-age dependency ratio (the number of people 65 and older divided by the number of those 15 to 64) will more than double from about 30% in 2015 to 64.3% in 2050. Pension spending currently accounts for about 14.0% of GDP, with health-care spending at about 6% of GDP. In the absence of any related policy action, health-care costs will increase at a higher rate than pensions.

Past social security reform efforts have gone some way to alleviating risks to the long-term sustainability of public finances due to population aging. Yet, we expect that the budgetary outlook will remain challenged given the near-term weak economic outlook and the absence of a resolute reduction in the budget deficit and government debt, reflected also in additional bank recapitalization costs.


  • Portugal's population is projected to decline by nearly 15% between now and 2050, but the elderly population will grow to 35% of this total.
  • Without further policy measures, this would increase government age-related spending on pensions, health- and long-term care to 24% of GDP by 2050. Net government debt would rise to 161% of GDP.
  • Despite some progress in pension reforms, Portugal's near-term budgetary outlook is clouded by a number of impediments to economic growth.

Demographic Pressures Are Growing

According to Eurostat population projections, the old-age dependency ratio in Portugal will rise to 64.3% in 2050 from 29.8% in 2015 (see table 1). Overall, we expect the population will continue to decline over the next decades, to 8.8 million by 2050, down from 10.3 million currently. While the active population has already been declining, the share of the working age population in the total population is projected to fall to 53.8% by 2050 from 65.7% currently. This implies a likely withdrawal of labor input from the economy over the long term. We believe that, without a compensating increase in productivity, this will likely continue to burden Portugal's already low economic growth potential.

In our view, an aging population will likely place substantial pressure on economic growth and public finances. Demand for publicly provided health care and long-term care services and state pensions could increase. Without further government reforms (not our base-case scenario), total age-related public expenditures in Portugal are projected to rise to 24.1% of GDP in 2050 from 22.0% in 2015. This increase of 2.1 percentage- points is nevertheless lower than the projected 3.7-percentage-point increase for the median of our 58-sovereign sample. We expect that the bulk of Portugal's age-related spending will go toward pension outlays, followed by health (see table 1). However, health-care expenditures will rise at a higher rate than pension expenditures, which are expected to peak in 2030 and decline thereafter as the savings from pension reforms that have been enacted up to now kick in more significantly.

Portugal's pension expenditures for the period 2015-2050 will grow more slowly than the EU average, whereas health-care expenditures are projected to grow faster than the EU average. Overall, however, total age-related expenditure will increase at a slower pace than the EU average.

A Significant Budgetary Challenge

The challenge is certainly not unique to Portugal. Nearly all major industrial societies will have to deal with the ramifications of aging populations sooner or later, as our global aging study has shown. However, in our opinion, Portugal is worse off than several other sovereigns in our sample, especially because of its already relatively high spending on age-related items and rapidly deteriorating demographic profile. This is also aggravated by simultaneous emigration coupled with a challenging budgetary position.

In our view, the increase in age-related spending in Portugal will grow at a higher rate until 2035, implying a gradual deterioration in the budgetary position in the long term. Our analysis suggests that without fiscal or structural policy reforms, net debt could rise to 161.5% of GDP by 2050 in Portugal, higher than the sample median, which stands at 134% of GDP. More specifically, we believe that despite important steps toward containing rising age-related expenditures, the future budgetary costs of population aging will not be contained without additional measures.

Absent Policy Changes, Public Finances Will Stay Pressured

Based on the economic and fiscal projections of our study, we derived hypothetical sovereign credit ratings for Portugal (see table 1). In practice, S&P Global Ratings takes a large number of factors into consideration when determining sovereign credit ratings (see "Sovereign Ratings Methodology," published Dec. 23, 2014). As such, a near-term improvement in Portugal's creditworthiness would in our opinion require a marked improvement in the economic growth outlook through, for example, the implementation of further structural reforms, continued budgetary consolidation that brings net government debt to below 100% of GDP, and an acceleration in orderly private-sector deleveraging so as to significantly reduce household and corporate indebtedness. It would also necessitate a discernible reduction in external debt and an improvement in the effectiveness of the monetary transmission mechanism.

In this simulation, however, we assume that in the very long term, the country's budgetary position and wealth (as measured by GDP per capita) tend to become the dominant factors. Using this approach--and if the current challenges are successfully overcome--by 2025 Portugal's economic and budgetary indicators could be more in line with sovereigns rated in the 'bbb' category. In our view, the projected improvement in GDP per capita would be able to offset the potential fiscal deterioration in the outer decades of our projection horizon.

Our results for Portugal are broadly in line with the findings of our Global Aging 2013 report. This is partly due to only a slightly lower projected increase in long-term age-related spending, a weak economic recovery, lack of progress in reducing the sovereign's budget deficit, and high government debt.

Budgetary Consolidation And Structural Reforms Would Yield Clear Benefits

Our base-case scenario is not a prediction. In fact, as we have observed in many sovereigns in our 2016 Global Aging report, governments are able to confront the prospects of unsustainably rising debt burdens by implementing budgetary consolidation or reforms of their social security systems.

As such we believe that over the long run the Portuguese authorities will likely introduce policies to contain the future budgetary impact of the population's aging. Our scenario analysis shows that if Portugal were to balance its general government deficit by 2019--our balanced-budget scenario--future net indebtedness would improve significantly (see table 1). On the other hand, according to our analysis, Portugal's fiscal indicators would hold up significantly better if the government were to undertake further structural reforms to prevent age-related spending from rising, pointing to improving long-term sustainability of public finances under such a scenario.

Despite Some Progress, Important Challenges Lie Ahead

In our view, Portugal's challenges to government finances have not been dealt with in an effective and comprehensive manner that would lead to a resolute reduction in the budget deficit and government debt, beyond the measures in pension and health-care systems.

Pension reform measures have so far included an annual extension in the statutory retirement age (set at 66 in 2015) by two-thirds of the increase in life expectancy. Moreover, the authorities introduced a so-called sustainability factor, which adjusts the amount of pension upon retirement subject to changes in life expectancy. Measures have included temporary suspension of pension indexation as well as a surcharge on higher pensions. The measures have been encouraging lengthier careers, while sanctioning early retirement. This has led to a slower growth rate in pension costs in recent years, and should generate savings in the long term. At the same time, health-care spending has declined substantially over a very short period of time. Severe cuts were suffered in health-care infrastructure, headcount, and coverage, offset by an increase in required out-of-pocket spending by the households that could no longer benefit from previously available and affordable health-care services or medical products (see chart 1). In our view, this is leading to questions about the adequacy of social security provisions, and has also contributed to reshaping the political landscape over the past few years.


However, while we expect changes in the social security system will improve the long-term sustainability prospects for public finances, the near-term budgetary outlook is clouded by a number of impediments to economic growth, among other things. The ratings on Portugal thus remain constrained by high public and private sector indebtedness, continuous fragility in the domestic banking sector, and as a result, a weak monetary transmission mechanism, all of which in our view will hinder Portugal's economic growth potential in the medium to long run. The ongoing acceleration in the demographic shift due to emigration exacerbates this challenge further and, over the medium to long term, we think that the low employment rate, if maintained, would likely restrain the economy's growth potential. In the near term, however, we believe that if policy slippages materialize, they could undermine the economic recovery and budgetary consolidation, for example, owing to deterioration in external financing conditions.

S&P Global Ratings' analysis of the Republic of Portugal is part of a global study conducted to analyze the cost of aging. We presented our findings in "Global Aging 2016: 58 Shades Of Gray," published April 28, 2016, on Global Credit Portal. The study explores various scenarios--including a no-policy-change scenario--and the implications that we currently believe these different scenarios could have on sovereign ratings over the next several decades. We included an additional eight sovereigns in this year's report, which expanded the scope of the study's coverage to a total of 58 sovereigns, representing 70% of the world's population.

Aging Population Data And Scenario Results: Portugal
2015 2020 2025 2030 2035 2040 2045 2050
Demographic and economic assumptions
Population (mil.) 10.3 10.1 9.9 9.8 9.6 9.4 9.1 8.8
Working-age population (% of total) 65.7 64.6 63.5 61.5 59.3 56.7 54.6 53.8
Elderly population (aged over 65; % of total) 19.6 22.4 24.5 26.8 29.1 31.6 33.7 34.6
Old-age dependency ratio (%) 29.8 34.7 38.5 43.6 49.0 55.7 61.8 64.3
Real GDP (% change) 1.5 1.7 1.3 1.2 1.0 0.8 0.7 0.7
Age-related government expenditure (% of GDP)
Pensions 14.0 14.6 14.9 15.0 15.0 14.8 14.6 14.4
Health care 6.1 6.4 6.7 7.1 7.4 7.8 8.0 8.3
Long-term care 0.5 0.5 0.5 0.6 0.6 0.7 0.7 0.8
Unemployment benefits 1.4 1.1 0.7 0.7 0.6 0.6 0.6 0.6
Total 22.0 22.5 22.9 23.3 23.7 23.9 24.0 24.1
Scenario 1: No policy change (% of GDP)
Net general government debt 117.8 115.7 114.8 118.0 124.2 134.0 146.6 161.5
General government balance (4.4) (2.7) (4.0) (4.5) (5.2) (5.8) (6.6) (7.4)
General government expenditure 48.3 45.5 46.8 47.3 48.0 48.6 49.4 50.2
Interest payments 4.8 5.1 6.0 6.1 6.3 6.8 7.3 8.0
Hypothetical long-term sovereign rating spec spec bbb bbb bbb bbb bbb bbb
Scenario 2: Balanced budget in 2019 (% of GDP)
Net general government debt 117.8 108.6 95.0 84.1 74.9 67.1 59.7 52.1
General government balance (4.4) (0.2) (0.8) (0.6) (0.6) (0.4) (0.2) 0.1
Hypothetical long-term sovereign rating spec bbb a a a a a a
Scenario 3: No additional age-related spending (% of GDP)
Net general government debt 117.8 114.1 108.6 104.8 101.2 98.5 96.1 93.6
General government balance (4.4) (2.0) (2.7) (2.5) (2.4) (2.2) (2.1) (2.0)
Hypothetical long-term sovereign rating spec bbb bbb a a a a a
Scenario 4: Lower interest rate (% of GDP)
Net general government debt 117.8 102.8 77.8 56.9 39.4 24.6 12.0 1.0
General government balance (4.4) 2.0 2.0 2.0 2.0 2.0 2.0 2.0
Hypothetical long-term sovereign rating spec a aa aa aa aa aa aa
spec--Speculative grade.