Towards a Unified Social Benefit in Portugal

Executive summary

This report provides a detailed assessment of the current social benefit system in Portugal and sets out reform proposals that aim to improve the effectiveness and efficiency of this system.

In Portugal there are broad concerns that the current social benefit system is overly complicated and poorly targeted with 27 different means-tested social benefits and a below-average impact in reducing poverty compared to other EU countries. This complicated system risks undermining the objectives of benefit provision by hindering access to and take‑up of support, while also failing to incentivise work for recipients of social benefits.

Moving towards a more transparent and simple solidarity benefit in Portugal would be a clear and important step in the right direction. Improvements to the existing system could unlock improved poverty-reduction, both directly through more targeted support, and indirectly through encouraging higher earnings and improved take‑up of benefit support. Simplification would also better prepare the social benefit system for future crises and facilitate efficiency savings from benefit delivery systems.

Key findings on the existing social benefit system

• The Portuguese social benefit system has one of the smallest impacts on poverty in the EU and the lowest average household income from social benefits. Poverty is reduced by just 2 percentage points as a result of social benefits (not including contributory benefits). This is a result of Portugal having below average working-age Minimum Income Benefits and one of the lowest coverage rates for social benefit support for unemployed and low-earning adults in the OECD.

• Minimum Income Benefit provides consistent and smooth work incentives, however other social benefits do not. Many social benefits have “all-or-nothing” income threshold criteria that can disincentivise adults from working full-time. In addition, dual entitlement to Disability Benefit and other support means there is almost no financial incentive for partners of disabled people to work, and the income rules for Child Benefit create work incentive traps where pay rises of up to 10% can end up reducing household income.

• With 27 separate benefits, the social benefit system in Portugal can be confusing and creates unnecessary duplication. The wide array of benefits is difficult to navigate and access for new claimants without extensive knowledge of the benefit system. This lack of transparency about entitlement undermines take‑up of benefits, while the interaction of different benefit rules creates unneeded duplication of support.

• A fractured social benefit system with manual applications and processes for many benefits means that it is poorly positioned for future crises. Almost two‑thirds of Portuguese recipients believe that, when needed, they are unlikely to receive the support they need from the benefit system.

Recommendation: proposed reforms of social solidarity benefits

• Reforms to solidarity benefits, the main out-of-work income replacement social benefits in Portugal, would support reducing poverty and improving employment outcomes. Potential reforms would simplify the existing solidarity benefits into a single, harmonised, benefit for households. A unified solidarity benefit would have a single set of consistent entitlement rules which would facilitate claimant understanding, reduce benefit stigma and aim to increase take‑up of support. A straightforward reform would simplify 10 working-age benefits, while a more comprehensive reform would consolidate all 15 existing benefits.

• Coverage of solidarity benefits would be improved by increases to the level of support or improved work incentives. More generous solidarity benefits and improved work incentives through a lower income deduction rate would expand entitlement to more low-earning households experiencing in-work poverty.

• Simplification would ensure improved provision of support for extra costs. Under the proposed reforms, households eligible for support for extra costs (such as pregnancy, adoption, and childbirth) would always receive additional support. Larger households would no longer be penalised by the interaction effect of different solidarity benefits that currently means they miss out on the extra cost support.

• The poorest individuals would benefit most from the proposed reforms. On average, incomes for individuals in the poorest 10% of the income distribution would see their disposable annual incomes increase by between EUR 21 to EUR 73 per year depending on the exact reform adopted. All pensioners would be entitled to same maximum level of income support as in the current system. However, the reforms would end entitlement to the Social Pension which would leave 0.5% of pensioners worse‑off.

• Work incentives would be simpler and smoother under the proposed single solidarity benefit. Combining solidarity benefits together would ensure that all recipients face a single, consistent earnings deduction rate. This would replace the existing all-or-nothing entitlement rules that can discourage working full-time. Reducing the earnings deduction rate for solidarity benefits to 70 percentage points (from 80) under the reforms would further enhance work incentives.

• Poverty would be reduced by higher benefit levels, with further falls if take‑up increases. Increasing solidarity benefit levels by 10% would reduce the 40%-of-median-income poverty rate by 0.10 percentage points. Improving work incentives by reducing the earnings deduction rate by 10 percentage points would reduce the same poverty measure by 0.06 percentage points. Larger increases in benefit levels and higher take‑up of solidarity benefits could further reduce poverty.

• The fiscal impact of the reforms would depend on specific reform option. Overall, the design of the reform proposals limit additional costs for the government and in some cases make savings. Simplification of solidarity support alone, both the straightforward reform of 10 benefits and the complete reform of all 15 benefits would both generate a fiscal saving of EUR 6 million and EUR 18 million per year respectively. Increasing basic benefit levels by 10% and reducing the earnings deduction rate by 10 percentage points (in addition to simplification reform) would cost EUR 42 million and EUR 18 million per year respectively. These estimated fiscal costs assume no change in take‑up of support which, if it were to increase, could incur further fiscal costs.