Review of the constitutionality of norms contained in the State Budget Law for 2014
Tate based on the rule of law;
Economic and financial crisis;
Financial assistance programme;
Public administration staff;
Public sector worker pay cuts;
Contribution payable on sickness and unemployment benefits;
Survivor’s pensions owed to surviving spouses and surviving members of cohabiting couples;
Principle of the protection of trust (legal certainty);
Principle of equality.
RULING No. 413/14
30 of May of 2014
1. The Constitutional Court declared the following norms included in the 2014 State Budget Law to be unconstitutional:
- A norm that reduced the pay of public sector workers. Acting in line with its earlier jurisprudence, the Court considered the extent of the differentiation that resulted from the amount of the new reductions and from the change in the base on which they were calculated to be excessive and thus contrary to the Constitution. This excess was particularly clear in the case of public sector staff with base monthly pay of between €675 and €1,500. The Court held that this norm violated the constitutional principle of equality.
However, for reasons linked to the exceptionally important public interest in question and as permitted by the Constitution, the Court restricted the effects of this declaration of unconstitutionality in such a way that it only produced effects from the date of the Ruling onwards.
- Norms that subjected the sickness and unemployment benefits to contributions of 5% and 6 %.
The Court found that these norms were in breach of the principle of proportionality. The role of the benefits in question is to substitute for pay that workers are deprived of when they are unemployed or ill. The budgetary goals of these norms did not justify sacrificing the recipients of lower benefits, which should only be reduced in extreme cases, as a last resort.
- Norms that determined new ways of calculating and reducing survivors’ pensions in cases in which they are accumulated with income from other pensions.
The Court noted that individual pensioners covered by this regime who receive the same overall monthly income from pensions and with the same rate of formation of a survivor’s pension could see the latter reduced by different amounts, depending on the proportion of the total value of the pensions concerned that came from the survivor’s pension.
Given that the legislator said the reason for the measure was to restrict the accumulation of multiple pensions, the Court was unable to discern material grounds that would have justified differentiating between subjective legal positions whose nature was exactly the same. This differentiation was not warranted by the stated purpose of the legal regime, inasmuch as the latter was said to seek to limit the amounts payable under survivors’ pensions when accumulated with other social benefits awarded to the same recipient for reasons of infirmity or old age.
The Court held that inasmuch as the measure affected the overall amount recipients were paid, but without fundamental grounds for this different treatment, the regime could be constitutionally criticised from the point of view of the principle of equality.
In addition, the Court also noted that the same norms reduced the amounts of the survivors’ pensions received by those who benefited from another retirement pension, while not touching other recipients of survivors’ pensions who received €2,000/month or more, regardless of the fact that the latter were also entitled to continue to do paid work. The Court took the view that this also breached the principle of equality.
2. The Court declined to declare the unconstitutionality of norms that suspended payment of pension supplements at state-owned business sector enterprises which had returned net losses in the last three financial years.
The present case involved an ex post facto abstract review of certain norms contained in the 2014 State Budget Law (LOE2014). It combined three requests, one made by the Ombudsman and two by groups of Members of the Assembly of the Republic into a single case.
1. Norm reducing the pay of public sector workers
The petitioners alleged the unconstitutionality of a norm that cut the total gross monthly pay of public sector workers above €675 by a progressive rate of between 2.5 % and 12 %.
The measure represented the first-time imposition of a pay cut on staff earning between €675 and €1,500/month, and increased the existing cut to which those earning more than €1,500/month had already been subject since 2011.
The petitioners argued the norm violated the constitutional right to be paid for one’s work, the general principle of equality, and the principles of proportionality and the protection of trust (legal certainty), all of which are included in the principle of a state based on the rule of law.
The Court recalled that when, in the recent past, it had found previous budget provisions on the monthly pay of public sector workers to be in conformity with the Constitution, it took into account that the legislator said those provisions were going to be transitional. Even though the IMF/EC/ECB Financial Assistance Programme (FAP) formally ended in May 2014, it subjected the whole of the 2014 budget year to financial constraints. It was thus still possible to relate the LOE2014 budget allocations to the budgetary stability obligations undertaken as part of the FAP; and therefore to say that the circumstances which meant that the effects which the 2011, 2012 and 2013 LOEs had on salaries should be considered non-definitive, were still in place in 2014.
The government report which accompanied the draft State Budget (OE) for 2014 said that the pay-cut measure formed part of a broader range of “Measures regarding the alteration of the pay policy” for public sector staff. It also stated the objective of: “doing away with an inappropriate Public Administration pay policy”, by correcting the “pattern of iniquity” deemed to exist between the public and private sectors. This pattern was said to consist of the fact that, compared to its private counterpart, the public sector offered higher pay for less demanding jobs with less responsibility on the one hand, while tending to pay less for more complex and demanding jobs on the other.
The Court took the view that these remarks in the draft OE represented an innovation in the explanatory statement on the changes in the remuneratory compensation payable as part of a public employment relationship.
Thus far, the argumentation on this subject had been constructed around the existence of “exceptional adverse conditions” and the “indispensable” need for the “sustainability” and “rebalancing of the public finances”. In the draft LOE2014, the measures were linked to the programme for a structural revision of spending and the reform of the Public Administration. The Court felt that this circumstance meant it was possible to suppose that the measures would extend beyond the end of 2014 and tend to become definitive.
However, for constitutional review purposes the Court decided this pay cut was a budgetary measure, and thus one that in constitutional terms can only be transitory in nature.
LOE2014 not only sought to impose the measure in question for the fourth consecutive year, but also to expand and increase the amount of the cuts. The measure came on top of other penalising measures – particularly the effective pay cut caused by an increase in working hours and by successive rises in contributions to the Civil Service Retirement Fund (ADSE).
Other measures with a general scope also continued to affect the professional situation and pay levels of public servants. These included: additional cuts in overtime payments; a general prohibition on pay rises due to promotions or advancements in the career structure, and on the award of any management bonuses; a reduction in the number of public servants working under fixed-term labour contracts; a 50% cut in the allowances paid to workers who are on extraordinary leave due to their inclusion in the ‘special mobility’ system; and an overall reduction of at least 3% in the number of workers in the state-owned business sector, compared to the figures at 31 December 2013 (hospitals classified as state-owned business entities are excluded).
On the other side of the equation – the fiscal burden supported by public sector staff (and others) – LOE2014 maintained the tax rises brought in by LOE2013.
The Court had already said in the past that the Constitution does not contain a rule which precludes pay cuts per se, but also that this issue cannot be considered simply irrelevant in constitutional terms. The Court took the stance that once the content of the right to a salary has been fixed using ordinary-law criteria, a legislative change which negatively affects that content must be adequately justified in the light of constitutional principles.
On the alleged violation of the principle of equality, the Court again recalled its own jurisprudence: that the legal-regime choices made by the ordinary legislator can only be constitutionally criticised in cases in which it is proven that they result in differences in treatment that are not justified on reasonable grounds, bearing in mind the purposes pursued by the Constitution.
Despite the fact that the length of time that had passed since LOE2011 entered into force meant the legislator was subject to a gradually increasing requirement to find alternatives that would prevent the differentiated treatment meted out to public servants from becoming excessive, the Court had already expressly stated that in the current financial context it was still admissible for there to be some differentiation between persons paid out of public funds and those who act in the private economic sector. Inasmuch as the 2014 budget year is still conditioned by the budgetary consolidation effort imposed as part of the FAP, there are no reasons to change this understanding.
Given the public interest in achieving budgetary consolidation, one cannot believe that it is possible to dispense with any and all effects on remunerations paid from public funds, nor can one jurisdictionally prove the argument that such effects are not an acceptable way of reducing the public deficit. As such, the grounds for differentiating between workers who are paid out of public funds and those who are not do continue to exist.
As to the extent of the differentiation, the effort that LOE2014 sought to demand of public sector staff introduced significant increases in the degree of their sacrifice. The Court again referred to its own case law to say that this inequality of treatment cannot be excessive, and that from the point of view of the fair distribution of public costs, there must be a dimension of equality which the differentiation solution must take into account.
The Court held that the criteria defined in its Ruling on LOE2013 should be maintained. This meant that the extent of the differentiation that directly resulted from the new pay-cut rates and the change in the base on which they are calculated was excessive and constitutionally unlawful in the light of the principle that public costs must be fairly shared among society.
2. Norm regarding pension supplements
An LOE2014 norm suspends payment of pension supplements to both active workers of, and former workers who are now retired or receive pensions from, enterprises in the state-owned business sector that had returned net losses in the last three closed financial years on the date on which LOE2014 entered into force. It also says that such payments will only be resumed after the enterprise in question has made three consecutive annual profits.
The Court recalled its own jurisprudence on the principle of the protection of trust (legal certainty), under which this type of situation only warrants protection when: the expectations that the legal regime in question will remain stable have been induced or fuelled by the behaviour of the public authorities; those expectations are legitimate – i.e. founded on good reasons, which must be evaluated as such within the axiological constitutional-law framework; and the citizen affected by the situation has oriented his/her life and made choices based on those expectations that the existing legal framework would be maintained.
These conditions must also be complemented by a process of weighing up the private interests that are unfavourably affected by the amendment of the normative framework that regulates them on the one hand, and the public interest that justifies the change on the other. This process cannot reveal the existence of public-interest reasons which, on balance, justify discontinuing the behaviour that generated the expectation.
In the present case it is the enterprises that assumed the liability; the state did not do so directly and did not behave in any way that would have generated expectations.
The norm concerns the regulation of a matter linked to the indebtedness and self-sustainability of state-owned enterprises, and falls within the framework of the corporate legal relationship between state-owned enterprises and their public shareholders. The management criteria that permitted the award of pension supplements were not connected to the reasons that have now dictated the suspension of their payment.
There is no evidence that the state in its role as member of companies’ boards of directors and as the entity that performs the shareholder function induced these enterprises to formalise the payment of pension supplements in their collective bargaining and labour agreements.
The supplements in question are not remuneratory in nature. They are paid on top of the pensions that are already awarded by the social security welfare system, Caixa Geral de Aposentações (CGA), or another social protection system, all of which are contributory. The supplements are mere benefits that do not constitute either pay, or a pension that is legally owed under the terms of the social security legislation. The justification for them is to enable profits made by each enterprise to be shared by the labour factor of production – the enterprise’s workers. Such a benefit may make sense from the perspective of the overall management of the enterprise, but it implies a sharing of income which, from the point of view of a strict business rationale, does not have to be allocated to the labour factor.
If the enterprise instead makes a loss, payment of this benefit worsens that negative result and undermines the enterprise’s economic and financial viability. In time, paying it can become unsustainable and even endanger the enterprise’s continued existence.
The Constitution guarantees both the coexistence of the public, private and cooperative/social sectors of ownership of the means of production, and the freedom of initiative and organisation within the overall framework of a mixed economy. The constitutional economic order precludes the state from favouring enterprises that belong to the state-owned business sector in relation to their competitors from other sectors.
State-owned enterprises are also subject to the Competition Law, and cannot be attributed improper public aid. Public operating subsidies may be justifiable, but only if they fulfil a rationale that requires them to be in the public interest.
If an enterprise that awards pension supplements ceases to be economically and financially self-sustainable, those awards must also cease until the enterprise recovers its ability to self-finance its current production activities. One cannot consider expectations that pension supplements will continue to be paid to be legitimate until that recovery has occurred.
The legislator limited itself to suspending payment of the pension supplements solely in situations in which the enterprise that would otherwise owe them is not financially self-sustainable. As such, the Law safeguards both the interests of the recipients and the managerial autonomy of the enterprise.
The Court also found that this norm is not in breach of either the principles of equality and proportionality, or the right to collective bargaining and labour agreements.
The Court took the view that on the constitutional level, the issue of supplementary social security benefits is not included in the essential content of the right to collective labour agreements.
In the view of all the above, the Court declined to find this norm unconstitutional.
3. Norms regarding sickness and unemployment benefit contributions
The Court was asked to review the constitutionality of norms that subjected the sickness and unemployment benefits to contributions of 5% and 6% respectively.
Social security institutions were to deduct this contribution from the benefits they paid, and the resulting funds were to constitute income for the welfare system.
The Court emphasised that these are contributory benefits (included in the general compulsory contributory social security regime) whose purpose is to substitute for labour income (welfare subsystem). They are concrete implementations of both the fundamental right to material assistance that pertains to workers when they are ill or involuntarily find themselves in unemployment, and the constitutional right to social security.
The unemployment benefit is a kind of compensation for non-fulfilment of the right to work; and should under ideal conditions be universal, with no time limit, for as long as the involuntary unemployment situation persists, and permit a decent standard of living. However, inasmuch as it is a right to benefit payments, its precise concrete implementation depends on the legislator.
Turning to the sickness benefit, the Court said that the Constitution does not contain an express reference to material assistance in cases of non-occupational illness. However, conjugation of the constitutional norm that gives workers the right to assistance in involuntary unemployment situations with the constitutional right to social security and solidarity, does appear to result in a constitutional requirement that the ordinary law provide for forms of material assistance for workers who, although not unemployed, are temporarily prevented from working for another reason.
Given the essential nature of this type of benefit, the right to conditions that guarantee the minimum needed to ensure a decent standard of living must be seen as a positive right that is immediately binding and justiciable.
The question is whether it is constitutionally legitimate to reduce the monetary amount owed in situations of illness or unemployment.
In past cases and in various situations the Court had already asked itself whether or not this question involves the guarantee of the minimum needed to ensure a decent standard of living, in that these benefits do in fact represent an expression of the minimum amount needed to live decently. In the present case, the Court also focused on the unreasonableness of the measure when it affected beneficiaries who are in a more vulnerable situation because they are not in a position to earn income from work in order to provide for the vital needs of their household.
The Court said that whether or not one should consider there to be a guaranteed minimum amount for these benefits below which they cannot be reduced was not relevant to the question of constitutionality here. The important issue was rather the need to take account of the special vulnerability of the people at whom the measure was targeted, inasmuch as the regime itself already means the benefits awarded to them represent a substantial reduction in the monetary income they would otherwise receive from their labour.
The principle of reasonableness is linked to the principle of proportionality in the strict sense. In general terms it serves to assess how reasonable it was to impose the contributions from the perspective of the consequences they had in the personal sphere of the affected persons. Here, the question is not the adequacy of the degree of sacrifice imposed versus the importance or urgency of the goals pursued by the benefits, but rather gauging whether or not the way in which that sacrifice affects them is intolerable from the point of view of the people concerned. From this perspective, unconstitutionality exists if the charges that are imposed exceed that which is legitimately tolerable in a state based on the rule of law.
The safeguard clause introduced in LOE2014 means that the lowest possible unemployment benefit is equal to the Social Support Index Value (IAS, €419.22/month), and can fall to as little as 80% of that figure in the case of the Social Unemployment Allowance (SSD, €335.38/month); while the minimum sickness benefit is at most 30% of the daily IAS (= €125.70/month). All these amounts are close to or even fall short of the threshold below which people are at risk of poverty.
As such, the Court said that even if one were to consider that some reduction in the amount of these benefits was legitimated for budgetary consolidation reasons, the recipients of the lowest benefits were excessively penalised. The decision to pay unemployment and sickness benefits should not be seen from a welfare point of view, but rather as the effective implementation of a right that is incorporated into the social security system enshrined in the Constitution.
The Court therefore declared these norms unconstitutional.
4. Norms regarding survivors’ pensions for surviving spouses and surviving members of cohabiting couples.
The petitioners also asked for a review of the constitutionality of the LOE2014 norms on survivors’ pensions. The latter consist of a monthly monetary benefit equal to: in the case of pensions regulated by the Statute governing Survivors’ Pensions, half the retirement pension the social security contributor was receiving at the time of his/her death, or to which he/she would have been entitled if he/she had been retired on that date; or in the case of pensions subject to the general social security regime, 60% (a single surviving spouse or cohabiting partner) or 70% (shared by a surviving spouse or partner and one or more surviving ex-spouses or ex-partners entitled to alimony from the deceased) of the invalid’s or old age pension the beneficiary was receiving or would have been entitled to on the date of his/her death.
In the last fifteen years Portugal has witnessed a major increase in the social protection provided in the form of social transfers made under both contributory and non-contributory regimes. The proportion of GDP represented by this heading has practically doubled.
The pension system is a central public issue that needs to be taken into account when what is at stake is the sustainability, not just of the country’s social security systems, but of the whole of its public finances.
The Portuguese pension system employs a sharing format and not a capitalisation one, which means that it is the active members of the population who fund the beneficiaries’ pensions. One way not to reduce the amount of existing pensions would be to increase the burden on the current generation of workers by imposing more taxes or contributions on them. The government has instead chosen to use principles of intergenerational equity to split the costs of this adjustment generationally, between pensioners and workers.
The Court took the view that while these norms did fall within the framework of the overall set of spending-cutting measures, they did not limit themselves to requiring a percentage reduction in pensions above a certain threshold in 2014; they instead represented a normative reconfiguration of the rate at which pensions are formed, in a way that both influenced the rules for calculating the amounts that are awarded in future pensions and recalculated current pensions downwards.
The Court said it was necessary to ask whether the cut in survivors’ pensions operated by the application of new formation rates was capable of affecting the right to a pension in its role as a manifestation of the constitutionally guaranteed right to social security.
Portuguese constitutional jurisprudence has taken the position that although they are covered by the principle of the protection of trust (legal certainty), both the requisites for acquiring the right to a pension and the rules for calculating the effective amount of pensions can, within certain boundaries, give way to the public interest that justifies the reversibility of laws.
That which the Constitution guarantees is the right to a pension, not the right to receive a certain amount in the form of a pension. The concrete amount is calculated by applying criteria that possess infra-constitutional value. The essence of the question is whether there is an important public interest – the need to guarantee the economic/financial sustainability of the state and the pension system – which can justify recognising that the legislator enjoys a broad scope within which it can shape these rules.
All these considerations also apply to survivors’ pensions, given that they are a benefit which seeks to cover one of the eventualities included within the material scope of the protection provided by the welfare system or the convergent social protection system, alongside the retirement pension, which is also subject to a principle that future beneficiaries must first contribute to the system.
Seen in the light of these criteria, the norms did not violate the constitutionally relevant content of either the right to social security or the right to a pension.
The legislative amendments in question did not eliminate the minimum protection available to surviving spouses or surviving members of cohabiting couples whose economic capacity has been reduced by the death of the beneficiary.
It is not the Constitutional Court’s place to evaluate the strategy that is being pursued in order to balance the country’s public finances, nor should it participate in the debate on whether that strategy ought to focus on the income or the spending side of the equation. Its role here was solely to gauge whether the solutions challenged by the petitioners were arbitrary because they overburdened a certain category of citizen gratuitously and without due justification.
The question one could ask is whether, if the norms did fulfil the criteria for the application of a new regime for calculating survivors’ pensions in terms of adequacy and necessity, it was justifiable for the only holders of the right who are affected by them to be surviving spouses and surviving members of cohabiting couples who accumulate this type of pension with other retirement pensions?
After weighing everything up, the Court concluded that the size of the reductions was not sufficient to make it conflict to an intolerable extent with life decisions that the pensioners had already taken, nor did it entail a degree of sacrifice that could be seen as disproportionate or too heavy compared to the advantage associated with the public-interest goals pursued by the legislator.
The measure’s subjective scope was circumscribed to recipients who accumulated the survivor’s pension with at least one retirement pension; the norm did not apply to any other cumulative income situation.
However, as it stood, the way in which the norm’s applicative scope was delimited did leave the Court somewhat perplex, given that a person who accumulated a survivor’s pension with income from work would only see the pension reduced when he/she stopped working and instead received a retirement pension – a moment at which he/she thus entered a more vulnerable situation.
The measure’s impact on the monthly income of the recipient of the survivor’s pension would depend on the proportion of his/her overall income it represented, inasmuch as the cut only affected the survivor’s pension and no other pensions. Overall pension-based incomes of the same amount could be the object of very different reductions, because the greater the proportion of the total represented by the survivor’s pension, the greater the impact of the cut in question would have been.
These norms imposed an additional charge, affecting legal positions that had already been or were being formed, by changing the pension calculation formulae, but only for recipients who received another retirement pension and had thus left the active working life. The norms did not touch other beneficiaries of survivors’ pensions who received the same or a greater amount, but with this particular type as their only pension, and regardless of whether they still engaged in any paid activity.
The norms were thus especially burdensome for, and only sacrificed, people who were in a more vulnerable situation, thus making the absence of any justification for the differentiated treatment they meted out even more evident, and warranting a finding of unconstitutionality.
The Ruling was the object of a total of 13 dissenting opinions, thus reflecting the complexity of the questions before the Constitutional Court, which is made up of 13 Justices. However, the fact that these opinions addressed different norms meant that it was nonetheless possible to secure a majority in relation to each particular norm.
Rulings nos. 128/09 (12-03-2009); 396/11 (21-09-2011); 353/12 (05-07-2012); 187/13 (05-04-2013); and 602/13 (20-09-2013).