July 17 (Bloomberg) -- Brazilian President Luiz Inacio Lula da Silva presented legislation to help rein in the $20 billion annual state pension system deficit after making last-minute concessions to lawmakers to preserve some benefits.

The proposal aims to reduce pension costs by 50.7 billion reais ($17.7 billion) over 20 years, Jose Pimentel, a federal deputy and the bill's sponsor, told congress in Brasilia. Lula, facing criticism from state workers and members of his own party, agreed early today to raise pensions at the same pace as wages for current retirees to help win support for the bill.

Lula, a former labor leader who took office Jan. 1, has helped restore investors' confidence in Brazil's ability to keep paying its debts by pledging to push through the pension legislation. Brazil's currency has surged 24 percent against the dollar this year after dropping by a third last year.

The compromise legislation ``preserves the basic thrust of reform,'' said Daniel Vairo, a trader in Rio de Janeiro with Opportunity Asset Management Ltda., which manages about 6 billion reais in assets. ``What we can't have now are more changes.''

Concessions

Until this week, Lula had wanted to slash pension benefits for current retirees and government workers in addition to future retirees. Pedro Thomazoni, equity director for Lloyds TSB Bank Plc in Sao Paulo, said Lula has shown a willingness to compromise too early in the legislative debate, which could weaken the proposal as well as other planned reforms, such as changes to the tax system that are aimed at stimulating economic growth.

``The government gave in a lot and at an early stage,'' said Thomazoni said. ``The quality of the reform will remain under question if we see more concessions for the coming weeks.''

Finance Minister Antonio Palocci told legislators that further changes to the bill may undermine confidence among investors and Brazilian citizens.

``I am certain that legislators will have the right vision, the sense of what's at stake with this project,'' Palocci said at a press conference in Brasilia.

About 50 government workers clashed with police before forcing their way into the congressional building in Brasilia. Some workers wearing plastic clown noses and carrying banners booed lower house congressional leader Joao Paulo Cunha as he entered congress.

Lula has endured a 10-day strike by government workers and criticism by judges and leaders of his own Workers' Party over efforts to reduce public pension benefits.

`Betrayed'

``We were betrayed,'' said Maria Julia Rabello de Moura, a retired congress worker and advisor in congress matters for the national attorneys' union in Brasilia. ``Be sure that this will have a political cost for the government. People are angry.''

Brazil's currency weakened 0.84 percent to 2.8675 per dollar as of 6 p.m. in New York. The benchmark 8 percent bond due 2014 rose 0.99 cent on the dollar to an offer price of 89.31 to yield 10.7 percent, according to J.P. Morgan Chase & Co. The bond was trading at about 70 cents at the start of the year.

After two days of negotiations with the nation's 27 state governors, Lula won their endorsement for the new legislation. In the hours before the bill was introduced, Lula had to make more concessions to win over opponents, agreeing to maintain a policy of increasing retirement benefits when state workers get a raise.

``A couple of setbacks in the pension reform will not cause me to sell Brazilian bonds at this point,'' said Ruggero de Rossi, who manages $4 billion in emerging-market bonds, including Brazilian debt, at Oppenheimer Funds Inc. in New York.

The new bill would lower pension costs by 16.5 billion reais through 2010, or 4 percent less than Lula's original plan.

U.S. Endorsement

The pension overhaul is needed to pare the country's debt and boost investment, said Randal Quarles, the U.S. Treasury's assistant secretary for international affairs.

``Passage and implementation of these reforms will lay the foundation for the reduction of Brazil's debt levels and free up future government resources for productive investment,'' Quarles told the Brazilian-American Chamber of Commerce in New York.

Benefits for state workers hired after the bill's passage would be reduced. The government also plans to raise the minimum retirement age by seven years to 60 for men and 55 for women in an effort to cut pension costs.

In addition, the government would match up to 1,058 reais of a retiring worker's last monthly salary. Workers who earn more than that would get pensions equal as much as 70 percent of their salary upon retirement.

Last Updated: July 17, 2003 18:21 EDT