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SeLFIES for Portugal: An Innovative Pan European Retirement Solution

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Part of the Financial and Monetary Policy Studies book series (FMPS,volume 48)

Abstract

With a rapidly aging population, Portugal faces some serious pension challenges including a Social Security system which is under pressure, and pension benefits gradually approaching levels that will require individuals to supplement Social Security with private savings. In addition, Portugal has a low rate of financial literacy and hence transferring the responsibility of retirement planning to the general population runs a major risk of many individuals retiring poor. While some attempts have been made to create private pension plans, they have not had the level of acceptance as has been the case in some of the Anglo-Saxon countries. This paper argues that the government of Portugal could issue a new form of Sovereign Contingent Debt Instrument (SCDI) that can address the growing retirement challenge and achieve other goals as well. SeLFIES (Standard-of-Living indexed, Forward-starting Income-only Securities) are a new type of bond that greatly simplify retirement planning to the level of basic financial literacy and can not only address retirement security, but also improve the government’s debt financing and funding for infrastructure. Finally, since Portugal is part of the EU, the demand for these new bond instruments could be Euro-wide thereby providing additional benefits to the government in reducing its overall financing cost.

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  • DOI: 10.1007/978-3-030-29497-7_10
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Notes

  1. 1.

    O Sector dos Serviços e os Desafios da Segurança Social” by Confederação do Comércio e Serviços de Portugal, “Segurança Social: Modelos e Desafios” by Conselho Económico e Social and “Estatísticas Anuais e Trimestrais” by Autoridade de Supervisão de Seguros e Fundos de Pensões (ASF).

  2. 2.

    IGFCSS Annual Report 2017 and “Fundo dos Certificados de Reforma – Folheto Informativo, Dec 312,018 by Segurança Social Portugal, http://www.seg-social.pt/documents/10152/16069308/Newsletter_2018/2cbc6b0a-c93b-4f96-9a9b-491ae0da2c96

  3. 3.

    O Sector dos Serviços e os Desafios da Segurança Social” by Confederação do Comércio e Serviços de Portugal, “Segurança Social: Modelos e Desafios” by Conselho Económico e Social and “Estatísticas Anuais e Trimestrais” by Autoridade de Supervisão de Seguros e Fundos de Pensões (ASF).

  4. 4.

    Segurança Social: Modelos e Desafios” by Conselho Económico e Social and “Estatísticas Anuais e Trimestrais” by Autoridade de Supervisão de Seguros e Fundos de Pensões (ASF).

  5. 5.

    Authors’ calculation from ASF Annual Report and the active population from PORDATA.

  6. 6.

    https://tradingeconomics.com/portugal/government-debt-to-gdp

  7. 7.

    https://www.igcp.pt/fotos/editor2/2019/Boletim_Mensal/02_BM_fev.pdf

  8. 8.

    Muralidhar (2018).

  9. 9.

    https://www.anderson.ucla.edu/faculty-and-research/anderson-review/annuities-fairness

  10. 10.

    https://www.europeandatajournalism.eu/News/Data-news/Life-expectancy-after-retirement-a-very-unbalanced-Europe

  11. 11.

    Admittedly, this is not a fair comparison as proponents of GDP-linked bonds have tried to use this bond to create PAYGO like pension plans, and ensure counter-cyclical payments (ie, high returns when market rates of interest are low or negative). See Frijns et al. (2016).

  12. 12.

    Breeden (1979).

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Acknowledgements

Thanks to Adam Kobor and Herman Kamil for help and feedback. All errors are our own. These are the personal views of the authors.

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Correspondence to Arun Muralidhar .

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Merton, R.C., Muralidhar, A., Ferreira, R.S.P. (2019). SeLFIES for Portugal: An Innovative Pan European Retirement Solution. In: da Costa Cabral, N., Cunha Rodrigues, N. (eds) The Future of Pension Plans in the EU Internal Market. Financial and Monetary Policy Studies, vol 48. Springer, Cham. https://doi.org/10.1007/978-3-030-29497-7_10

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