TRIBUNAL CONSTITUCIONAL Portugal

RULING No. 575/14

14 of August of 2014

Headnotes:

The Constitutional Court found that norms which defined the scope of application of a proposed Sustainability Contribution (CS) and the formula for calculating it were in breach of the principle of the protection of trust (legal certainty), and therefore pronounced them unconstitutional.

The Sustainability Contribution would have applied to all pensions paid to single recipients by public social protection systems, regardless of the grounds on which the pension is awarded, including not only pensions paid by the different public systems, but also all monetary benefits owed to pensioners and retirees under supplementary regimes, whatever they may be called.

The Court considered that the CS consisted of a pension-cutting measure in the strict sense, which affected legal positions that deserve intense constitutional protection within the overall framework of the control of the protection of trust (legal certainty).

When the rules governing the formation of pensions are changed before the point at which those pensions exist as “sealed” rights pertaining to their beneficiaries, it is already appropriate to use the parameter of the protection of trust (certainty) to measure the admissibility of the legislative amendment. This is all the more true of cases in which the change affects the amount of a pension that is already being paid out. In such situations the beneficiary has already seen a precisely defined subjective right enter his/her legal sphere and is in a position to demand that the state pay him/her his/her due, all the more so in that the exact content of the right today was determined by the legal rules that were in place when the right became part of the beneficiary’s legal sphere in the past. In such circumstances the consistency of the legal position affected by the entry into force of a new law is at the highest possible level for the purposes of the control of the protection of trust (certainty).

In addition, when the CS sought to affect acquired rights, it was entirely indifferent to the differences between the situations of pensioners who, solely because they left the active life at different moments in time, now found themselves worse off as a result of the evolution in the legislation on pensions. This is an issue that raises serious difficulties on the level of equality, internal fairness and intergenerational justice.

The legislator invoked the public interest in ensuring the sustainability of the public pension system. However, in the circumstances described above, when the means to this end is a measure that merely cuts the amount of pensions without taking account of other relevant factors which might mitigate the damage done to the pensioners’ subjective legal positions, that public interest cannot be held to prevail over the intense sacrifice imposed on the private subjects in question, whose protectable expectable interests would be disproportionately affected, thereby violating the constitutional principle of the protection of trust (legal certainty).

Given the intensity of the effects on the private subjects’ legal positions, the legislator was under a special burden to substantiate its decisions. It is not enough to generically invoke a goal of the sustainability of the public pension system. It is necessary to demonstrate that a pension-cutting measure based on the mere application of a percentile proportion of the monthly amount of each recipient’s pension or total pensions, objectively constitutes a means that is fitting in the light of the desired result, is apt to achieve that result, and is necessary to the extent that there are no other means that would achieve the same result in a way that was equally effective but less burdensome for the persons affected.

In the recent past the legislator had adopted other solutions that were especially designed to ensure the sustainability of the pension system, either by changing the way pensions are calculated, or by bringing in a sustainability factor in the shape of a mechanism for automatically adjusting the amount of pensions and the conditions governing their award in the first place to variations in the population’s life expectancy. In budgetary terms, merely cutting the value of pensions by a given percentage – as was the case with the earlier Extraordinary Solidarity Contribution (CES) – serves only to reduce short-term spending, without offering the ability to adapt to new circumstances resulting from demographic or economic changes; changes to which the future legislator can then only respond (unless it opts for a structural reform) with new one-off measures that increase the percentage of the cuts or expand the universe of beneficiaries affected by the contribution.

The Court took the view that in these circumstances, and when not accompanied by a justification capable of overcoming the doubts about the measure’s fitness and necessity, the interest in the sustainability of the public pension system was incapable of configuring a public interest strong enough to prevail over the intensity of the sacrifice imposed on private subjects. It therefore found the norms unconstitutional.

Summary:

The norms before the Constitutional Court in this prior review case concerned the proposed creation of a Sustainability Contribution (CS).

The Court rejected outright both the idea that the CS was comparable to the earlier CES, and the allegation that the people affected by the former would be better off in terms of the amount of their pensions than they had been under the latter. Given its transitional nature (which implied the need for it to be renewed in each Budget Law), the CES did not produce legal effects that modelled the content of people’s subjective legal positions with regard to the applicable benefits they received from the public social security system. The CS, on the other hand, would have had a lasting negative effect on the strictly legal plane on legal positions held by the current beneficiaries of that system.

When, in the past, the Constitutional Court was asked to pronounce itself on the constitutionality of the CES as configured in the State Budget Law for 2013 (LOE2013), and then in the Amending Budget for 2014, it found that its nature was that of an exceptional and temporary budgetary measure designed to remain in force for a year and directly related to the immediate objectives of achieving a budgetary balance and ensuring the sustainability of the country’s public finances. The Court legitimated the CES’s constitutional conformity in the light of the parameters derived from the principles of the protection of trust (legal certainty) and proportionality, but solely on the basis that it possessed the aforesaid nature.

In addition to the difference between their material and temporal scope as referred to above, the specific difference between the CS and CES lay in the fact that the former sought to cut pensions by less than the latter, thus leading the author of the government bill to say in the accompanying explanatory statement that: “pensioners will have a higher income than that which would result from the application of the CES, thereby substantially recovering purchasing power”.

The Court considered that merely reducing the applicable rates was not capable of changing a measure that was typical of a budgetary rule designed to immediately save on public spending (CES) into a structural measure (CS) intended to ensure the medium and long-term sustainability of the public pension system.

Notwithstanding the fact that the term ‘contribution’ might suggest that the CS was a revenue-type measure, all it actually did was to consubstantiate a cut in the nominal amount of pensions. It worked by deducting the amount of the Sustainability Contribution from the amount of the pension, with the former calculated by applying a percentage to the latter and with the operation carried out by the entity that processed the pension. There was no transfer of funds outside the public pension system.

The Constitutional Court recalled its jurisprudence on both the meaning and scope of the right to a pension and the fact that the state is required by the right to social security to organise and maintain a social security system. The Constitution does not directly determine the details of the pension system and other social security system benefits, or the criteria for awarding them or deciding their monetary value. It is up to the ordinary legislator to specifically model these elements of the content of pensions, with a freedom of decision that varies depending on the determinability of each of the relevant constitutional rules.

Recognising the right to a pension is not the same as recognising the right to a pension of a given amount. Neither recognition of the right to a pension, nor the specific protection afforded to that right, by themselves eliminate the possibility that the concrete amount of the pension can be reduced. The right to that amount only takes on precise content through ordinary legislation, which means that its value is infra-constitutional. The right to a certain pension depends on the state’s financial possibilities – i.e. is subject to that which is possible – and is permeable to conjunctural pressures. However, it does also enjoy the specific protection derived from the key structural principles of a state based on the rule of law, such as the protection of trust (legal certainty) and proportionality.

The vulnerability of this right to a pension of a certain amount is also derived from the way in which the right itself is structured. Its formation possesses a medium and long-term temporal structure, and the fact is that the socioeconomic contexts which form the framework for the work of the legislative authorities can change radically over the benefit’s lifetime.

Here in Portugal, the right to a pension is acquired in accordance with the contributory principle, under which the recipient and other entities must fulfil certain obligations over time, which are the necessary precondition for the formation, also over time, of the right to receive a “monetary benefit that replaces the income earned from work” once one’s active life is over. These payments that replace labour income must be funded by contributions from both workers and employers. The amount of the benefit to which each recipient is entitled is a quantum that is both defined (principle of defined benefits), and is determined in accordance with the workers’ and the employers’ contributions that have been paid (contributory principle).

The Court rejected an idea that is sometimes invoked: that there is a general prohibition on going backwards in terms of social rights, such as to prohibit any new legal regimes that might affect legal situations encompassed by earlier laws. This would run the risk of destroying the autonomy of the legislative function, whose typical characteristics, such as the freedom to create measures without regard to precedent and the freedom to reverse one’s own legislative acts, would be practically eliminated. The Court said that it is necessary ensure a harmony between the stability of the legislative acquis that has already been achieved in the social rights field on the one hand, with the legislator’s freedom to shape legislation on the other. This harmonisation implies distinguishing between situations in which the Constitution gives a sufficiently precise order to legislate, when the ordinary legislator’s freedom to take backward steps in the degree of protection that has already been attained is necessarily quite minimal, from those in which the prohibition on social retrogression is limited by the principle of democratic alternation and operates only when the change that reduces the content of a social right either affects the guarantee of fulfilment of the minimum imperative content of the constitutional precept, or implies violation of the principle of the protection of trust (legal certainty) because of the arbitrariness of the retrograde step. The legislator’s power to reverse its own laws is based on the principle of democratic pluralism and is not unlimited, but must instead coexist with other constitutional principles.

A state based on the rule of law is one in which there is legal certainty, which requires that citizens be able to know what they can count on. The legislator’s ability, in the light of different historical demands, to change options that were adopted in the past is unrestricted (subject to compliance with the applicable constitutional norms) when the new legislative solutions are designed to only have effect in the future; that ability is, however, subject to limits whenever the legislator decides that the effects of its choices will have certain repercussions for the past.

The Constitution does not impose a general prohibition on the ordinary legislator from making new legislative choices whose effects include repercussions on the past. These effects weaken one of the abilities that citizens of a state based on the rule of law must enjoy – to know what they can count on. This is precisely why the Constitution expressly forbids retroactivity in the case of restrictions on constitutional rights, freedoms and guarantees, the definition of forms of behaviour that are punishable under the criminal law, and the creation of taxes and the definition of their key elements. The fact that there is no express constitutional prohibition on resorting to gradual and very variable forms of “true” or “pseudo” retroactivity in other cases does not mean the ordinary legislator can use them in every other type of situation. The principle whereby the Constitution generically enables the legislative power to make its decisions affect the past, in different ways and to different extents, is subject to limits derived from the necessary coexistence of this principle and the legal certainty dimension of the principle of a state based on the rule of law.

The problem is more delicate when, albeit the new legal norm is only designed to have effects for the future, it in fact touches on existing legal relationships formed under earlier law. In such cases it is necessary to weigh up the certainty and good faith in which citizens who were legitimately counting on the continued existence of the legal discipline under which their legal situation was defined in the eyes of the law are entitled to trust on the one hand, against the reasons why the legislator made the changes that are going to affect those citizens’ legitimate expectations on the other.

The Court restated its view that for a constitutional-law protection of trust (certainty) to exist, the state (particularly the legislator) must have engaged in behaviour capable of generating expectations of continuity in the minds of private subjects; these expectations must be legitimate, justified and based on good reasons; the private subjects must have made life plans that took the prospect of continuity in the state’s behaviour into account; and there cannot be public-interest reasons which, when weighed up against the private interests, justify discontinuing the behaviour that led to the situation involving the expectations.

The Constitution does not leave the ordinary legislator free to decide whether or not there should be some social or solidary form of protection for the elderly, at a time in their lives when earning income from labour is no longer existentially possible. Notwithstanding the fact that this right is created by reversible ordinary law, in this domain the issue involves both the same value choices as those that justify the constitutional requirement for the existence of a social security system which Constitution obliges the state to organise, and the same value choices as those that are present in the norms which define the state programmes and tasks inherent in a Republic committed to the construction of a solidary society.

The explanatory statement included in the bill submitted to the Assembly of the Republic justified definitively cutting the amount of pensions that were currently being paid out, precisely because of the demands imposed by the so-called ‘intergenerational contract’. The author of the bill called this cut a 'Sustainability Contribution’.

The Court recognised the important weight these grounds possess under the Constitution. If the consistency of the affected rights is heightened, so is that of the need for them to be affected, given the importance or the rights and interests –themselves also protected by the Constitution – which the explanatory statement said justified them. If the extent to which a constitutional principle (here, the principle whereby pensioners’ legitimate expectations that they are indeed going to receive a defined benefit which was acquired under earlier law) is not fulfilled is great, the reason justifying that non-fulfilment must be greater still. In the present case and in the light of the Constitution, the effect on pensioners’ rights could only be downplayed if it was shown to be necessary in order to satisfy “constitutionally protected rights and interests that must be deemed to prevail”.

A legal model that rigidly maintains the solutions which were thought out under law defined in the past can lead to an unjust treatment of both the existing generations of welfare-system beneficiaries, and the generations who currently make up the active Portuguese population and whose “contributions” ensure the welfare model’s funding at the moment. In circumstances like the present ones, one must bear in mind that the trust (certainty) of those who modelled their life plans on a law that was in force at a given moment in time cannot be protected at any cost. It must be counterbalanced by the expectations – uncertain by the nature of things – that the present generations of workers, taxpayers and social-security contributors have that they will benefit from the same system in the future.

In the light of the manifest imbalances of a social security system which, if it carries on as it is, could end up forcing the Republic to disrespect the budgetary discipline commitments it has made to its partners in the European Union – a failure that could then in turn imply sacrificing the constitutionally protected rights and interests of future generations in order to fulfil the (also constitutionally protected) rights and interests of current generations – the Constitution can be said to give the ordinary legislator the power to modify the system and adapt it to present-day demands.

The Court said that the measure before it was not arbitrary or unintelligible. However, it remained to be determined whether it would be excessively burdensome for the persons it affected, to a point at which it would not be possible to conclude that the constitutionally protected rights and interests justifying it were prevalent in this case.

The question was whether, given the degree of intensity with which requirements of legal certainty and the protection of people’s legitimate trust in the continuity of the law were damaged, the Court was in a position to say that the rights and interests also enshrined in the Constitution and invoked in order to justify such damage prevailed over the sacrificed rights and interests.

At issue was the fulfilment of an objective principle – in general that of a state based on the rule of law, and specifically of the right to social security derived from value judgements that structure the whole constitutional system and are of interest to the entire community. The measure undermined the contributory principle and the tendency for there to be at least some match between the contributions a beneficiary makes and the amount of the pension he/she may later receive following retirement.

Over the years, the successive legislation on the pension system has gradually imposed harsher conditions for subscribers and beneficiaries of both the CGA welfare system and the general social security regime; but in all the situations in which conditions worsened, the legislator either restricted the effects of its measures to the future, or created a transitional law with a clause designed to safeguard existing rights.

The Court said that although the norms before it constituted a modification of the normative treatment of a certain category of situations, albeit one determined by legislative policy reasons that justified the definition of a new legal regime, in the present case and with the declared objective of fulfilling the public interest in the sustainability of the social security system, the legislator was seeking to affect rights that had already been formed under earlier legislation.

If the legislator creates a new legal regime designed to affect any legal situation encompassed by earlier law (here, by definitively reducing pensions that have already been awarded), it must consider the unequal situations that may arise in the universe of the measure’s targets. If it fails to take these inequalities into account, it is not possible to say that the differences between the old and new regimes are the result of a normal succession of laws. The new law sought to undermine the principle of non-retroactivity and to apply to realities that had already been regulated – realities that would be marked by unequal treatment under the new legal regime.

As such, a measure of this type raises serious difficulties on the level of both equality and internal fairness and intra-generational justice.

Nor did the measure resolve any problem on the inter-generational justice level, because it did not configure a reform model that was consistent and coherent and in which citizens could trust.

The norms accentuated both the situation of inequality applicable to existing pensioners, and that regarding the current contributors to and beneficiaries of the pension system. The Sustainability Contribution would have been a definitive measure, and one that would also affect recipients of future pensions, but without any weighing up of the serious effects that the successive changes in the pension calculation regime and the introduction of the sustainability factor would immediately mean for the determination of the amount of pensions and even of the age at which people can gain access to pensioner status.

The Sustainability Contribution would have been completely indifferent to both the effort made by future pensioners and the cut that the legislative amendment would have imposed on pensions ab initio.

The Constitutional Court therefore pronounced the unconstitutionality of the norms before it.

Supplementary information:

Three Justices dissented from the Ruling, while two more attached concurring opinions to it.

Cross-references:

Rulings nos. 287/90 (30-10-1990); 349/91 (03-07-1991); 99/99 (10-02-1999); 318/99 (26-05-1999); 509/02 (19-12-2002); 675/05 (06-12-2005); 302/06 (09-05-2006); 128/09 (12-03-2009); 188/09 (22-04-2009); 3/10 (06-01-2010); 187/13 (05-04-2013); 862/13 (19-12-2013); and 572/14 (30-07-2014).