Will Retirees Bankrupt Brazil?

The choice: make changes now, or rob the kids to tend Grandpa.

How many of them can Brazil keep supporting?

Photographer: Christophe Simon/AFP/Getty Images

Like their rich world peers, Brazilian politicians have learned to promise the moon while on the stump and, once elected, beam the bill to Earth. So no surprise that all contenders in Brazil's recent presidential race vowed to care for the elderly and provide dignified pensions for all without busting the national budget.

Just how they meant to do that was a mystery. Social Democratic challenger Aecio Neves and Socialist Party candidate Marina Silva drew applause for committing to scrap an unpopular, yet penny-saving rule that discourages early retirement by paying lower benefits to younger retirees. Neither said much about what they'd put in its place, nor how to cover the inevitable shortfall -- roughly 3.5 billion reais, or $1.35 billion, according to economist Marcelo Caetano.

Incumbent Dilma Rousseff defended the current arrangement while discarding proper pension reform. All three ignored the anaconda in the room: one of the world's most bloated social security systems, which spends far more than it collects, devouring the savings of future generations.

Brazil faces a demographic quandary. It is still young, but graying fast. Though perched squarely among middle-income nations, with around $12,000 in gross national income per capita, it splurges on pensions. "Brazil's problem is that it is getting old before it gets rich," said Caetano, an analyst at the Applied Economic Research Institute, which published a massive new study on Brazilian social security this week.

Spending a whopping 12.2 percent of its gross domestic product on social security benefits, Brazil has one pensioner for every three workers. That's more than all the Group of Seven nations except Italy, where pensioners outnumber workers three to one, Caetano said.

Left untouched, Brazil's loss-making social security system threatens the world's seventh-largest economy with Hobson's choice: make painful adjustments now or rob the kids to tend Grandpa. For now, reform seems unlikely.

With no minimum retirement age for private sector jobs, Brazilians quit the workplace when most societies are still punching the clock: men at age 54 on average, and women, at 52. And since Brazilians are living longer than ever, men can expect to draw benefits for another 26 years and women, for an additional 33, the study shows.

Even at the country's modest pension rates ($665 per month, on average), that's hard on public coffers. This year the social security system, which pays just private sector pensioners, is expected to reach 50 billion reais ($21 billion) in the red.

Hence, pension reform is a perennial emergency. Brazil has tried several quick fixes over the past three decades -- in 1998, another in 2003 and the last in 2012. Each made advances -- a minimum age for government pensioners, penalties for early retirement -- to curb distortions and boost savings. All have been dialed back by noisy interest groups.

One of the loudest is public employees, who may stop working at a relatively youthful age, 60 for men and 55 for women, and still draw pensions averaged to their career salaries, or slightly less, for the recently hired. Military pensioners have it even better, retiring at full salary, while their daughters count on lifetime pensions, a quaint perk dating back to Brazil's war with Paraguay, which ended in 1870.

The result: Brazil spends about as much on a million government retirees as it does for 27 million private-sector pensioners. That same social chasm inspired economist Edmar Bacha to rebrand Brazil circa 1970 as Belindia, a tiny, prosperous Belgium ringed by a vast and destitute India. Now Belindia's putting on its pajamas.

As Brazil grays it also must grow, and with fewer able bodies on the job, that means boosting productivity. A push from the Palace could conceivably turn policy around, said economist Paulo Tafner, a Brazilian social security analyst. Instead, he noted, government has opted to distribute income and credit, hoping to spend its way to prosperity.

Brazil still has a policy window, a decade or so during which workers will still outnumber the young and the old. But with the 60-and-overs outpacing all other age groups, the "sweet spot" is fading fast.

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