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Pension reform is Brazil’s “first and biggest challenge,” economy minister Paulo Guedes has stated. (Photo: Brazil Planning Ministry)
Wednesday, January 23, 2019

Brazil: Bolsonaro Success Where Temer Failed?

Will Brazil’s new president Jair Bolsonaro be able to pass pension reform?

Inter-American Dialogue

Pension reform is Brazil’s “first and biggest challenge,” Paulo Guedes said as he took office as the country’s new economy minister on Jan. 2. The previous day, Brazil’s new president, Jair Bolsonaro, vowed that his government would not spend more money than it takes in. The country’s pension system has a deficit that is projected to hit 218 billion reais ($57.2 billion) this year, up from an estimated deficit of 202.4 billion reais last year. What has contributed to the pension system’s ballooning deficit? How difficult will it be for Bolsonaro’s government to come to agreement with legislators on achieving meaningful pension reform? How critical is it for the government to reduce the deficit, and how should it go about that task?

Monica de Bolle, director of the Latin American Studies program at Johns Hopkins’ School of Advanced of International Studies: The ballooning deficit of Brazil’s pension system is the result of a number of factors, including overly generous benefits to segments of the civil service, such as the military and members of the judiciary, the indexation mechanism that ties benefit adjustments to the minimum wage and, most importantly, changing demographics and an aging population. Brazil has no formal minimum retirement age, which means that many are able to take advantage of retirement benefits at a very early age, further adding to expenditure pressures. Bolsonaro will likely face the same difficulties that plagued past Brazilian administrations in passing a comprehensive pension reform that addresses medium-term sustainability issues. Importantly, excessive benefits to privileged groups need to be eliminated, but these groups tend to have a strong political influence. In Bolsonaro’s case, his close ties with the military are likely to force him to yield to pressures to exempt the military from the pension reform. That will lead other powerful interest groups to demand the same thing. This is exactly what happened to Temer’s original pension reform proposal, which saw a substantial dilution due to such pressures. The risk is that, like Temer, Bolsonaro ends up with a watered-down pension reform that does little to alleviate ballooning deficits and adequately address medium-term fiscal sustainability. Reducing the deficit and reforming the system are critical to reducing debt-to-GDP ratios and ensuring solvency. Without pension reform, the debt-to-GDP ratio is likely to grow without bound, increasing the chances of a fiscal crisis over the next few years. Pension reform is particularly unpopular, which will require substantial political negotiation skills and experience that Bolsonaro does not possess. Temer, a skilled politician who was also well versed in the inner workings of the Brazilian Congress, failed at passing pension reform. Therefore, it is currently difficult to see how Bolsonaro will succeed where Temer failed, despite the fact that he currently enjoys solid support from the new Congress.

Milko Matijascic, researcher at the Institute of Applied Economic Research (IPEA) in Brasília: The sharp increase of the so-called pension deficit involves many problems. First, the population is aging, increasing benefit expenses. Second, the Brazilian labor market traditionally presents high levels of unemployment and reduced levels of regular jobs, limiting the potential number of regular contributors to pension schemes. Finally, since 2014, the economic crisis has severely affected Brazil, deteriorating tax collection and increasing the precariousness of local labor markets. Promoting effective pension reform involves a complex political process. For instance, 60 percent of votes in two rounds are required in the Chamber of Deputies and the Senate to approve a constitutional reform. Representatives of rural workers, populations living in smaller municipalities and those involved with trade unions have aggressively opposed pension reforms since the 1990s. Reducing pension expenditures can ensure social security’s effectiveness as a public policy. For example, the current benefits plan allows the insured to retire early and remain employed in the labor market, accumulating both salary and benefits. Administrative costs are high and require attention in Brazil. Those problems increase public spending and divert resources that otherwise could be allocated more effectively. Finally, authorities intend to adopt individual pension accounts, as in Chile. This decision usually involves increasing public spending in order to fund the transition cost between a pay-as-you-go and fully funded pension schemes.

Pedro Rossi, professor at the economics institute of the State University of Campinas: First, it must be remembered that the public pension system in Brazil is responsible for making poverty in old age a residual problem. There are important corrections to be made, especially with regard to the pensions of public service workers, such as the military, but a radical switch to a model of capitalization can have important distributional effects, including increasing poverty. In addition, it is necessary to understand the Brazilian fiscal deficit within the context of the greatest crises in the country’s recent history, where austerity measures have had an important role. Social security is not responsible for the huge fall in revenues due to the crisis, the rise of unemployment and informality. Restoring a normal scenario of growth and an increase in employment are important for a healthy fiscal adjustment. Therefore, one should think about the impact of the fiscal adjustment measures on growth, in addition to its distributional impact. In this context, a balanced pension reform focused on the reduction of privileges can make an important fiscal contribution in the medium term, but it is not the short-term solution for the Brazilian economy.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor


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