Last week, the European Court of Human Rights (“ECHR”) released its decision in the combined cases of Da Conceição Mateus v. Portugal and Santos Januário v. Portugal. In this case, the Applicants, Antonio Augusto Da Conceição Mateus and Lino Jesus Santos Januário, were two Portuguese nationals who had seen a reduction in their pension payments. The Applicants’ state pensions were set up in 14 equal installments: one per month, plus additional holiday and Christmas payments in July and December. In December 2012, the Applicants’ holiday subsidies were reduced by approximately 24 percent. The pension cut was only to affect the holiday and Christmas payments, while their monthly pension remained the same, and was scheduled to last from 2012 to 2014. After 2014, the holiday and Christmas pensions would return to their normal rate.
The backdrop for backdrop for this story is Portugal’s financial crisis. In 2011, the Portuguese government negotiated an Economic Adjustment Programme for which it received 78 billion euros. As part of that deal, Portugal had to outline various spending cuts it would make, one of those cuts being a reduction in public sector pensions.
Interestingly, a challenge made to Portugal’s Constitutional Court found the cuts to be unconstitutional because there was no similar reduction in the private sector. But the ECHR upheld the cuts, in light of Portugal’s exceptional financial troubles. The Court said that Portugal appropriately balanced the interests of the individual against the general interest of the community. Also noting the limited duration of the pension cut, the Court said Portugal stayed within its boundaries to decide economic and social policy.
This is an interesting case because there are many individuals around the world facing the same struggle – whether their employer was the government or a private entity. It is a difficult balance, especially when the government was the employer, because any pension reduction could give rise to a takings claim. But I believe in this case Portugal was justified in reducing the pensions in order to address a domestic financial crisis. Assuming that both the holiday and Christmas pensions were reduced by the same amount (approximately 24 percent), the total reduction for the year would be around 3.5 percent. I understand that this could be a significant decrease to someone living on a fixed income, but I believe the cuts were warranted for the greater good.
What do you think? Should Portugal have been forced to pay the Applicants (and, presumably, all retired government employees) their full holiday and Christmas pensions? Was there a better way for Portugal to address their financial crisis? Are you worried this could become a slippery slope?
Source: European Court of Human Rights
Photo: Simple Tax
Portugal, like many governments, faces an extreme budget issue. Budget cuts have to be made, but as per usual, no one wants the cuts to affect them directly. It is no surprise that pensions would be the first target of the Government. While I respect that the people who have earned these pensions worked decades to secure them, it can’t go unnoticed that there is a domestic financial crisis that needs to be addressed. Pensions have become a luxury in the world we live in. The amount that governments have locked themselves in to paying is often astronomical. Current pension rates combined with increased life expectancy has made paying these tabs impossible. Reducing holiday pension payments seems like a great way for both sides to meet in the middle. Of course this is going to anger those who feel like they are owed their full pension, but the world is changing, and this must be taken into account. Nothing in life is really guaranteed except death and taxes.
Portugal, like many European countries, faces fiscal difficulties that can only be resolved in one of three ways – (1) Raise taxes (2) Cut benefits (3) Do both. It seems that it has chosen to take path #2 (however I’m sure Portugal’s taxes are probably pretty high too). Given the economic problems Portugal faces, I do not believe this result was unreasonable, but perhaps there are better ways of achieving it. For example, maybe pensions should be cut on an individual basis, starting with the people who need them the least. Governments around the world are always quick to raise taxes on the wealthy, but I never understood why they don’t take the opposite approach instead – cutting benefits from those who do not need them. It seems that would be a less contentious way of addressing fiscal problems.
Anyone that reads this should not assume the US is immune from such problems. Our Social Security system is entering a phase (Baby Boomer retirement) where it is on an unsustainable path. Down the road, I expect this to be a major issue in our own government.