Rousseff’s Bid to Limit Brazil Pension Deficit Passes First Test
Brazil’s lower house of Congress approved yesterday the main guidelines of a bill that caps government pension payments, a move that Moody’s Investor Service Inc. says may contribute to improving the nation’s credit rating.
In a 318 to 134 vote, lawmakers approved changes that limit at 3,916 reais ($2,300) the amount the federal government can pay each month in pensions for retired public servants. To receive more, employees must make contributions to individual retirement accounts created by the law, with the government’s matching contributions limited to 8.5 percent of the amount each employee’s salary exceeds the pension ceiling.
President Dilma Rousseff challenged members of her Workers’ Party and set a deadline for approval of the bill after her predecessor, Luiz Inacio Lula da Silva, failed to deliver on pledges to limit pension spending during his eight-year rule. If approved by the Senate, the law would gradually eliminate a shortfall responsible for a third of Brazil’s 94 billion reais public deficit last year, according to government estimates.
“The reform, if finalized, can be billed as a credit- positive event” said Mauro Leos, a Moody’s sovereign credit analyst for Latin America. “It’s an element that may contribute to an improvement of the rating down the road,” he said in a telephone interview from New York.
The new 3,916 reais limit for retiring government workers compares with average pension payments of 6,589 reais per month for workers in the executive branch and 22,444 reais for those in the legislative branch.
Generous pension benefits have long been a magnet attracting workers to Brazil’s public payrolls, and a major contributor to a government deficit that stood at 2.6 percent of gross domestic product at the end of last year.
Currently, retired government workers receive pensions amounting to 80 percent of their average salary during their last decade of employment. Brazil racked up a 38 billion reais deficit last year to cover the pensions of the 664,253 retired civil servants, compared with a 43 billion reais deficit for 28 million people receiving social security.
Under the bill, three private pension funds will be created to manage the retirement accounts set up for newly hired federal government employees.
The current pension deficit is part of a “perverse equation” that rises at a 10 percent pace a year, Social Security Minister Garibaldi Alves told lawmakers Dec. 7. “It’s a tragedy foretold,” he said, adding that the bill is essential to avoid future retirement cuts similar to the ones being made by European governments such as Spain and Greece.
With passage of the bill, Brazil’s pension deficit would be eliminated by 2048, Jaime Mariz, who oversees pension funds at the Social Security Ministry, told reporters in Brasilia yesterday.
For Jankiel Santos, chief economist at Espirito Santo Investment Bank, approval of the bill will provide a long-term boost to Brazil’s efforts to lower interest rates, the highest in the Group of 20, by limiting government outlays that fuel inflation.
Brazil’s central bank on Jan. 18 lowered the benchmark Selic rate to 10.5 percent from 11 percent.
In 2003, Lula pushed through Congress a constitutional amendment authorizing the government to cut pension payments. Still, he didn’t send a bill enacting the changes until 2007 and it hadn’t reached the floor of either chamber until Rousseff on Oct. 3 set a deadline for Congress to vote on it.
“This shows that this administration is willing and may be able to push for reforms that have an impact on medium-term fiscal consolidation,” said Leos.
Brazil’s debt rating was raised on June 20 by Moody’s Investors Service to Baa2, the second-lowest investment grade, from Baa3. The rating company cited Rousseff’s efforts to cut spending as a reason for the upgrade and gave Brazil a positive outlook. Standard & Poor’s raised the country’s foreign-currency rating to BBB, from BBB-, on Nov. 17, with a stable outlook.
“We changed Brazil’s rating recently and we took into account that the bill was likely to pass,” Sebastian Briozzo, S&P’s sovereign ratings director for Latin America, said in a phone interview from Buenos Aires. “It’s important that Brazil continues to take steps in the right direction.”
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