Brazilian government struggling to push pension reform forward, some dilution likely to be necessary for approval

A demonstrator holds a sign that reads in Portuguese "I will not work until I die" during a protest against federal government proposed reforms in Rio de Janeiro, Brazil. 15 March 2017.

PA 30554663

In February 2017, the Brazilian Congress started debating the terms for a much-needed pension reform, essential for Brazil to achieve financial stability and a sustainable fiscal position.

Brazil's pension bill currently represents about 18% of GDP, the country's population is ageing fast, life expectancy is rising while birth rates are declining. Pension scheme liabilities for both public and private-sector workers account for about 50% of the fiscal deficit. The government's ability to fund the growing pension bill is severely constrained by constitutionally-mandated caps on the national budget. Furthermore, with public debt growing rapidly, the government needs to cut pension expenditure to avert a collapse of business confidence.

On average, Brazilians retire when they are 54 years old. Widows can keep the pensions of their deceased spouses. Everyone is entitled to a basic pension at 65, regardless of whether or not they contribute. Many professions are entitled to special retirement schemes, with teachers able to retire when 55 (men) or 50 (women). Pension for Civil Servants similarly operate under rules which are often even more generous than private sector pension arrangements. Pensions in Brazil are linked to the national minimum wage, which grows above inflation, thus the pension bill grows in real terms every year.

The key points of the reform

• A minimum pensionable age of 65 years for men and women.
• Men and women will have to contribute for at least 25 years to be entitled to a retirement pension.
• To receive the maximum allowable pension workers will have to contribute into the system for 49 years.
• Future rises in retirement age, if necessary, will be allowed without the need to change the constitution.
• Annual increases for most pensioners (lowest earners will be exempt) will no longer be linked to the minimum wage.
• A transition period will apply for workers who are closer to retirement, benefiting women older than 45 years and men aged over 50.
• End of special retirement plans.
• The benefit paid for elderly and disabled poor workers will no longer be indexed against the minimum wage.
• Pension benefits for civil servants will be the same across all categories.

The reform, if approved, will do much to contain the fiscal deficit, currently at about 10% of GDP. It will also boost business confidence in Brazil, helping the country recover faster from its deepest recession on record.

However, the reform is very unpopular. Last weekend saw the largest protest against the pension reform so far; protest marches took place in 23 states, with some violence. Also, many congressmen are concerned about the impact of unpopular reforms on their future electoral prospects. Politicians face growing pressures after General Prosecutor Rodrigo Janot asked the Supreme Court to open formal investigations against 83 top politicians, including six serving ministers, over their involvement in the Petrobras-linked Lava Jato corruption scheme.

Changes to the pension system can only be implemented via a constitutional reform and as such, require the approval of both houses of the Congress, with three-fifths majorities needed for two votes in each house.

The two most controversial points in the reform (which attract most opposition in Congress) are also the most crucial: the minimum retirement age and the need for workers to contribute for 49 years to get the maximum benefits. Many congressmen (including members of the governing party, PMDB) are already challenging both aspects publicly.

Outlook and implications

The Temer government is likely to be forced to amend the pension bill to achieve its passage. President Michel Temer recently told a business summit in São Paulo that the pension reform was not set in stone and that his government was open to consider suggestions. The bill has already received 164 amendment proposals from legislators, including those loyal to the government. Most pro-government parties appear to agree on supporting key features, such as extending the minimum retirement age, increasing minimum contribution years and possibly detaching pension payments from minimum wage indexation. Achieving these three features are crucial for the government and if achieved would constitute a major positive step in its efforts to establish fiscal sustainability.

A potential compromise acceptable for the government would be to accept slight changes to the minimum retirement age, perhaps lowering this to 62 or 63 years for women. The need to contribute for 49 years into the system to obtain maximum benefits is relatively likely to be lowered by a few years. The proposed transition period is also likely to be reviewed: the majority view in Congress is that more flexibility is needed on this point. Similarly, it is very likely that the government will accept that the benefits paid for the elderly and disabled poor should remain linked to the minimum wage. Additionally, some civil servant categories and the police are likely to keep their special retirement rules.

The serious corruption allegations brought by federal prosecutors against dozens of legislators and key cabinet ministers could potentially derail the pro-pension reform government coalition in Congress. However, since all these cases have to be tried by an already overstretched Supreme Court extensive legal delay appears inevitable. Social unrest also poses a threat to the reform, but it would need to escalate significantly from the levels seen so far to force a change in policy direction. On this basis, we continue to expect the Temer government to achieve passage of the reform approved towards the end of 2017 rather than in June as initially targeted by the government.