Saving Money Getting Old With Brazil Pension Bill: QuickTake Q&A

Michel Temer

Photographer: Christopher Goodney/Bloomberg

Facing a make-or-break year to pull Brazil out of its worst recession on record, President Michel Temer is betting that reforming the nation’s pension system will restore public and investor confidence. Similar efforts fell short under former heads of state Luiz Inacio Lula da Silva and Fernando Henrique Cardoso. Both Temer and his pension initiative are unpopular, and he’s had to accept a range of concessions to win support from lawmakers who are under pressure from their constituents. The amended bill was first read in Congress on April 19.

1. What’s the problem with Brazil’s pensions?

Government expenditures on pensions amount to roughly 13 percent of gross domestic product, according to official figures. Left alone, the cost of private sector pensions would more than double by 2060 to 17.2 percent of GDP from 8.1 percent currently. Under Brazil’s pension system, the active labor force pays for the pensions of the currently retired. An estimate from the national statistics agency shows that, while the active population will fall 6.7 percent by 2060, the number of retired people will grow 263 percent.

2. Where does Temer’s proposal stand?

As amended, Temer’s plan would set a minimum retirement age of 65 for men and 62 for women, requiring 40 years of contributions to receive full benefits. At present, there is no minimum retirement age in Brazil. Partial retirement benefits would be possible with fewer years of contribution. In the face of opposition, the administration had to backtrack from the original proposal of 65 years of minimum retirement age for both men and women and a 49-year contribution requirement. The military has been strategically left out of the reform proposal, but the government says that’s just for now.

3. How much money are we talking about?

The current proposal would save 630 billion reais ($200.4 billion) in the next 10 years, according to the lower house’s pension reform rapporteur, Arthur Maia. That amount represents about 80 percent of the originally projected savings, he said. The pension fund covering Brazil’s 1 million retired civil servants and military ran a deficit of over 77.2 billion reais in 2016, while the fund for Brazil’s 24 million private sector pensioners was over 149.8 billion reais in the red.

4. What’s the urgency?

Pension demands have contributed to deteriorating public finances, with the pension deficit having more than trebled over the last decade. The alarming state of Brazil’s public accounts resulted in the loss of its hard-earned investment grade status in 2015. The economy has contracted around 7 percent in the last two years and growth for this year looks anemic, meaning revenue has fallen sharply.

5. Who’s against the pension system changes?

Unions say Temer’s reforms would strip Brazilians of their constitutional rights, by restricting their access to guaranteed social benefits. They argue that, rather than limiting pension benefits, the government should be looking at reducing tax breaks, closing loopholes and fighting the tax evasion that reduces the amount of revenue available for pensions. A study by Denise Gentil, a professor at Rio de Janeiro’s Federal University, says there is no pension deficit. She argues that, if all of the taxes and contributions that are supposed to fund Brazil’s entire social safety net -- which includes pensions -- were used for that purpose, they would be sufficient to fully fund all expenses. The government sometimes diverts funds for other purposes.

6. What’s the outlook for approval?

As in other countries, the pension battle in Brazil hits on raw nerves because it directly affects the lives of millions of citizens. Temer’s approval rating of around 10 percent complicates matters. A media poll published in early April showing over half the lower house deputies against the overhaul sent shock waves through the government, and prompted policy makers to speed up negotiations. According to Carlos Marun, the president of the lower house’s special commission on the pension reform, congressional support for the bill has since increased as adjustments have been made. The legislation now has more than enough votes to clear the chamber of deputies, he said. Political risk consultancy firm Eurasia Group sees a 70 percent chance that more than half the government’s original proposal will be approved.

7. What happens if it isn’t approved?

If the reform is dropped altogether, there will most certainly be an asset sell-off, as pensions will swallow up an ever-increasing percentage of the budget and the country will be less likely to recover its investment-grade credit rating. That would further delay a recovery in investments and economic growth.

8. What happens next?

The first important vote is expected to come on May 2, when the special committee in the lower house will cast ballots for or against the legislation. It then has to pass two floor votes with support from three-fifths of the 513 deputies before heading to the Senate. In the upper house, the bill requires a minimum of 49 votes out of 81 votes in two rounds of voting to become law. Government members expect a vote on the floor of the house in May and in the Senate at the start of the second half of the year.

The Reference Shelf

  • A QuickTake explainer on Brazil’s economic ups and downs.
  • A QuickTake Q&A on the impeachment that brought Temer to power.
  • The time for negotiation is over, Temer’s team says.
  • Corruption scandal returns to haunt government.
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