The Inheritance
What does the Portuguese State leave to the people who are young now? The public debt, the part everyone argues about, has been falling for five years and is back at the euro-area average. The larger bills are less visible: a decade in which the State let its roads, schools and hospitals wear out faster than it replaced them, and a pension system kept affordable by paying the next generation of pensioners less, relative to wages, than this one.
Every generation hands the next a balance sheet. On one side are the assets: the roads and railways, the schools and hospitals, the institutions, what people know. On the other are the claims: the debts the State has run up, and the promises it has made, above all pensions, that the young will have to honour. Public argument about the young in Portugal usually starts and ends with the debt. It is the easiest item to measure, and it turns out to be the least worrying.
This essay, the first of two, reads the State’s side of that balance sheet: the explicit debt, what paying for it crowded out, who is owed, and the pension promises. The second part, The Rent, turns to the market: housing, and what it costs to start a working life. Like the previous essays on this blog, it is an assessment rather than a case, and the counterpoints are part of the answer.
The number everyone argues about
Portuguese public debt was 14 per cent of GDP in 1973. The years after the revolution took it to about 60 per cent by the mid-1980s, where it stayed, give or take, for two decades. The financial crisis doubled it: 114 per cent in 2011, the year of the bailout, 132 in 2014. The pandemic pushed it to its peak, 134 per cent in 2020. Since then it has fallen by 44 points, to 89.7 per cent in 2025, just above the euro-area average of 87.8 (Figure 1). Italy is at 137, Spain at 101.[1][2]
The fall came from two sources. Nominal GDP grew quickly, through real growth and then inflation, which shrinks a debt fixed in euros; and the budget, after a small surplus in 2019, was in surplus again in 2023, 2024 and 2025. The European Commission’s latest projection has the ratio falling to about 82 per cent in the early 2030s and then edging back up to 83 by 2036, as the cost of ageing adds 2.2 points of GDP to annual spending and the average interest rate on the debt rises from 2.4 to 3.6 per cent. In its less favourable scenarios the ratio ends between 88 and 91; its overall judgement of the medium-term risk is “medium”.[3]
Measured per person, the debt looks heavier, because there are fewer people of working age to carry it. At 2025 prices, public debt was about €19,000 per person aged 20 to 64 in 1996, €27,000 in 2007, €53,500 at the 2020 peak and €44,000 in 2025 (Figure 2). Per inhabitant, the 2025 figure is about €25,600.[4]
What the interest crowded out
A debt is a burden on the young only if it paid for something they do not also inherit. Borrowing to build a railway leaves a railway; borrowing to pay current bills leaves only the bill. The part of the Portuguese story that is least discussed is what happened to the railways, in the literal and the general sense, while the debt was being brought under control.
In 1995 interest on the public debt took 5.5 per cent of GDP and 15 per cent of all public revenue. It fell to about 3 per cent of GDP in the euro’s first decade, rose again to 4.8 per cent in the bailout years and is 1.9 per cent now, 4.4 per cent of revenue.[2] In the adjustment years it squeezed out the one kind of spending that could be cut without anyone noticing at once. Public investment fell from about 4.5 per cent of GDP at the turn of the century to 1.6 per cent in 2016; from 2012 to 2019, the State paid two to two-and-a-half times as much in interest as it invested. Figure 3 shows the result that matters: public investment net of depreciation, the wear and tear on existing public capital, was negative in every year from 2012 to 2022. Over those eleven years the State paid €93 billion in interest, at 2025 prices, invested €55 billion, and let its capital shrink by €17 billion.[2][5] Across the euro area, net public investment over 2012–2019 was about zero; in Portugal it averaged minus 0.8 per cent of GDP a year.
An estimate of the public capital stock based on the IMF’s dataset puts the fall in its value at 13 per cent between 2013 and 2024, and at 77 per cent of GDP in 2013 against 54 per cent in 2024.[5] This is the debt that does not appear in the debt statistics: hospitals and schools not renovated, trains not bought, courts not computerised, which the young will have to pay for when they are replaced. The European recovery funds have since reversed the trend: net public investment turned positive in 2024, and gross investment is forecast to reach 4.3 per cent of GDP in 2026, before falling back to 2.8 per cent when the funds end.[6]
Who is owed
The other change is in who holds the debt (Figure 4). In 2008 non-residents held 72 per cent of Portuguese public debt; by 2025 they held 47 per cent, and that figure includes the official European loans from the bailout. The Banco de Portugal, buying bonds under the euro system’s programmes, went from almost nothing to 26 per cent in 2022, and is now reducing its holdings. Households went from 5 per cent in 2012 to 18 per cent, mostly through savings certificates, which in July 2026 amounted to almost €50 billion, 15 per cent of the State’s direct debt.[7][8]
Debt held at home is not a transfer out of the country; the interest is paid by Portuguese taxpayers to Portuguese savers. Whether it is a transfer between generations depends on who those savers are, and the statistics do not say. What they do say is that the average interest rate on the stock is about 2.1 per cent, that new borrowing costs about 3.4, and that the average remaining maturity is seven and a half years: the rising cost of refinancing will be felt gradually over the next decade.[8]
The pension bill
The largest item on the State’s side of the balance sheet is not the debt. It is the pensions it has promised. Eurostat’s estimate of the pension rights already accrued in public schemes, by retirees and by today’s workers for the years they have already contributed, was 373 per cent of Portuguese GDP in 2021: 278 per cent in the general social security system and 95 in the civil servants’ fund. That is about four times the explicit debt, and eighth-highest in the EU, where the median is 317 (Figure 6).[9] The number depends heavily on the interest rate used to discount it: a point either way moves the social security figure between 226 and 354 per cent of GDP. And unlike a bond, a pension promise can be changed by law.
It has been. The European Commission’s Ageing Report projects Portuguese public pension spending at 12.2 per cent of GDP in 2022, rising to a peak of about 15.2 per cent in the mid-2040s and falling to 10.4 by 2070. It rises because the number of people aged 65 and over for every hundred aged 20 to 64 goes from 41 to 68. It falls, in spite of that, because the average pension relative to the average wage, the benefit ratio, falls from 53 per cent to 34 (Figure 5). Over the whole period the ageing of the population alone would add 7.3 points of GDP to pension spending; the fall in the benefit ratio takes away 6.1.[10] The legal retirement age, linked to life expectancy, rises from 66 years and 7 months to 69 years and 2 months; an early pension is cut by the “sustainability factor”, 17.63 per cent in 2026.[10][11]
This is the mechanism by which Portugal’s pension system is made sustainable, and it is a transfer between generations of a particular kind. It does not fall on today’s taxpayers; it falls on today’s young in their old age. A falling benefit ratio does not mean falling pensions in euros: pensions rise with prices, and future pensions start from future wages, so a pensioner in 2070 may well be better off in real terms than one today. But each future pensioner will stand further below the working population of their day than today’s pensioners stand below theirs. The latest European population projection, published in 2025, raises Portugal’s old-age dependency ratio in 2070 from 68 to 77, which would require either more of the same or something new.[12]
Generational accounts
Economists have a method for putting all of this in one number: generational accounting, which adds up the taxes each birth cohort will pay over its lifetime and subtracts the benefits it will receive, under current policy. The only full study for Portugal, with 1995 as its base year, found that a newborn would pay a net $61,800 over a lifetime and that future generations would have to pay $91,800, 48.7 per cent more, for the State’s budget to balance over time; closing the gap would have required raising all taxes by 4.2 per cent or cutting all transfers by 9.6.[13] That was before the pension reforms of 2002 and 2007 that introduced the sustainability factor and linked the pension formula to the whole career.
After them, the picture looks very different. A 2021 ranking of EU countries by the size of their total sustainability gap, explicit debt plus the present value of future deficits under current law, put Portugal fourth best of 27, with a gap of 19 per cent of GDP against a European average of 192: the legislated fall in future pensions more than offsets the cost of ageing. The authors themselves warn that this depends on those cuts actually being made.[14] The Commission’s own measure of the long-run budgetary adjustment needed puts Portugal slightly below zero, largely because of pensions, where the EU average points the other way.[3] In both, the burden has not disappeared. It has been moved from taxpayers to future pensioners.
Year by year, the flows are what one would expect. In the European national transfer accounts for 2023, the State transfers to a Portuguese ten-year-old about €6,300 more than it collects, mostly schooling; a 25-year-old pays about €3,100 more than they receive, a 45-year-old about €7,800; and at 65 the balance turns positive again.[15] Every generation makes that journey. The question is only whether each gets back what it paid in, and the pension projections say that those who are young now will get back less, relative to wages, than those who are old now.
What the young inherit
Put together, the State’s side of the balance sheet reads differently from the usual argument. The explicit debt, per person of working age, is more than twice what it was in the 1990s in real terms, but it has been falling for five years, the budget is in surplus and the projections are stable; much of it is now owed to Portuguese savers and to the Portuguese central bank. The larger costs are elsewhere. For eleven years the State did not maintain its capital, and the young will pay to rebuild it. And the pension system has been made affordable by a promise to pay the next generation of pensioners a smaller share of the wages of their time, a promise that looks sustainable on paper and that the young will be the ones to test.
There is another side to the inheritance, and it should be counted. The generation that ran up the debt also built a national health service, universal secondary schooling and a university system, which is why the young Portuguese adults of today are the best educated generation in the country’s history. Much of the debt of the crisis years paid for a recession and the rescue of banks, not for consumption. And a smaller pension relative to wages, in a richer country, is not necessarily a smaller pension. The State’s bill to the young is real, but it is not the largest bill they face. That one is set by the market, and it is the subject of the second part.
This piece was written collaboratively with Claude Opus 5.5 (Anthropic): human specification, editorial direction and critical review; machine data research, analysis and drafting. The figures and derived numbers are computed by scripts/generations.py, shared with the second part of the essay, from Eurostat’s government finance, population and price statistics, AMECO, the European Commission’s Debt Sustainability Monitor 2025 and 2024 Ageing Report, Eurostat’s supplementary table on pension entitlements and the European national transfer accounts. Debt per person and the cumulative sums for 2012–2022 are the author’s calculations at 2025 consumer prices. The national transfer accounts for Portugal are incomplete above age 74, and only working-age values are quoted. The downloaded sources, with a table reference for every number, are kept with the script’s data; results are in docs/generations-results.json and the figures in docs/generations-figures.html.
The cover photograph is 25 de Abril Bridge, Lisbon by Terry Kearney; CC0 (public domain dedication), via Wikimedia Commons, cropped.
Authored by: Luis Matos Ferreira — Physicist, Developer, Writer
- The Sustainability Story — the Portuguese pension system, its forecasts and what makes it sustainable.
- The Long Retirement — exit ages, healthy years and pensions.
- The Two-Thirds Country — Portugal’s productivity, hours and wages.
- Earned and Unearned — the split of income between work and capital, and how each is taxed.
- AMECO, European Commission, spring 2026: general government consolidated gross debt (UDGGL), Portugal, 1973–1994.
- Eurostat, Government deficit/surplus, debt and associated data (gov_10dd_edpt1), April 2026 notification, and Government revenue, expenditure and main aggregates (gov_10a_main): debt, balance, interest (D41), revenue, gross fixed capital formation (P51G), consumption of fixed capital (P51C), Portugal, euro area and selected countries, 1995–2025.
- European Commission, Debt Sustainability Monitor 2025, Institutional Paper 332, 12 February 2026: Portugal country sheet (debt projections and scenarios to 2036) and Table 3.2 (S2 indicator).
- Eurostat, population on 1 January (demo_pjan) and harmonised index of consumer prices (prc_hicp_aind); author’s calculation.
- Faria-e-Castro, “The Erosion of Public Capital in Portugal”, Federal Reserve Bank of St. Louis working paper 2026-016, August 2026, based on the IMF Investment and Capital Stock Dataset.
- AMECO, spring 2026 forecast: general government gross fixed capital formation, Portugal, 2026–2027.
- Eurostat, Structure of government debt (gov_10dd_ggd), holders of Portuguese general government debt, 2007–2025.
- IGCP, Boletim Mensal, July 2026: State direct debt, savings and Treasury certificates, average cost of the stock and of new issuance, average residual maturity.
- Eurostat, supplementary table on accrued-to-date pension entitlements in social insurance (table 29), nasa_10_pens1 and nasa_10_pens2, 2015, 2018 and 2021.
- European Commission, 2024 Ageing Report: Economic and Budgetary Projections for the EU Member States (2022–2070), Institutional Paper 279, Table II.1.64, and Portugal country fiche, Tables 1, 8 and 18.
- Portaria n.º 476/2025/1, de 29 de Dezembro (sustainability factor for 2026: 0.8237).
- Eurostat, population projections EUROPOP2025 and EUROPOP2023, Portugal, baseline.
- Auerbach, Braga de Macedo, Braz, Kotlikoff & Walliser, “Generational Accounting in Portugal”, in Auerbach, Kotlikoff & Leibfritz (eds.), Generational Accounting around the World, NBER and University of Chicago Press, 1999, pp. 471–488.
- Stiftung Marktwirtschaft and Forschungszentrum Generationenverträge, “Ehrbare Staaten? Update 2021”, Argumente zu Marktwirtschaft und Politik 160, Berlin, 2021.
- Hammer, Istenič, Verbič, Sambt & Prskawetz, European National Transfer Accounts, version 1.0.0, Zenodo, May 2026, Portugal, 2023.
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