need less than their full pre-retirement income in order to maintain their living standards.
This is due to three types of reasons. First, the earnings from work are subject to Social
Security payroll taxes. These are not paid in retirement. Additionally, income taxes are
frequently lower. Second, there is no more need to save for retirement. Third, work-related
expenses are much reduced. Munnell and Soto (2005) refer that the studies that have
examined the replacement rate that is needed to maintain previous lifestyle point to 70 to 75
percent of the pre-retirement earnings.
In the second place, appropriate levels of consumption are possible even when income
levels are low. This may be due to the availability of free or nearly free goods/services (like
free health care), and also to the existence of wealth levels resulting from accumulated
savings.
The remainder of the paper starts by setting out the institutional context of retirement in
Portugal, in section 2. Definitions and methodological issues are reported in section 3.
Section 4 provides evidence comparing low income incidence among retired people and the
rest of the population on each of the eight waves of the ECHP for Portugal. Section 5
analyses some factors associated with the changes in the individuals’ economic welfare
over a number of years around retirement. The dynamics of household income changes for
people who retire are studied and the issue of which personal and household characteristics
are associated with a higher risk of having low income in the years around retirement is
explored. In section 6 a multivariate probit model of the probability of entering low income
at the time of retirement conditional on not having a low income before retirement is
estimated. Finally, section 7 concludes and discusses some policy implications of our
findings.
2. The Portuguese Pension System
2.1. Main institutional characteristics
The Portuguese pension system is highly related to the Bismarckian model and can be
characterized as having a predominant first pillar which is divided into three different
provisions: the general scheme for private sector workers (employees and self-employed),