A Closer Look: Pension Reform in Brazil

Brazil’s population is aging and its retirement rules have become unsustainable. Everyone will have to work longer or retirement income will be impaired. Brazil is a relative slowpoke in its social security reform agenda, but the country is moving in the right direction.

No reform will be perfect. But the alternative is bankruptcy of the system, with grave consequences on inflation and public policies.

Demands for adjustments to the government’s proposal are legitimate. However, it cannot be ignored that some principles must be satisfied.

First of all, it is necessary to stabilize, over a not-too-distant horizon, social security spending in proportion to GDP, which is currently 8% in the federal sphere, a level comparable to countries with older populations, and will double in the next few decades.

Second, it is necessary to eliminate distributive distortions of the current rules. The system gives special treatment to groups that should have equal treatment.

Third, pension benefits should be a source of perennial resources that accompany the change in the consumption pattern in old age. It is only natural for the pension benefit to be substantially lower than labour income, because the spending of retirees tends to be lower than of working-age people. If people want to maintain their income, they need to save more, through the various instruments available. The higher health expenditures of old people should be the focus of public health policies, not the social security system.

The proposed reform has many merits because it makes progress on all three of these principles. The proposed 15/20 transition rule may appear tough, but it cannot be called ambitious from a technical standpoint when considering the end of the demographic bonus.

The expectation is that social security expenditures will stabilize in proportion to GDP in 20 years. Until then, the spending cap rule – establishing that public spending cannot grow more than inflation – will discipline the federal public budget and stimulate the elimination of inefficient and unfair public policies.

There is also progress toward removing distributive distortions by eliminating early retirements and accumulation of benefits, as well as reducing special regimes, all of which benefit wealthier people at the expense of the poorest.

To some extent, the country’s poorest will be insulated from the new reforms because they will continue receiving the same amount as the minimum monthly wage and will retire for age instead of time of service (35% of beneficiaries).

Setting equal retirement age for men and women is another important initiative, in light of the longer life expectancy of women; in 2013, the survival expectancy of women with age of 65 years was 20 more years, versus 16 for men.

Another advance will be to reduce the replacement rate (the ratio between the pension benefit and active income) of richer people. The poorest group, who earn the minimum wage, will maintain a rate of 100%. Among the richest group that retire for time of contribution (19% of beneficiaries), those who work less will receive less. According to the proposal, a person with 25 years of contribution will have a replacement rate of 76%. This is in no way discordant with the global norm.

There are those who advocate a shorter contribution time to receive full benefits in relation to the proposal, of 49 years. The space for flexibility, however, is not large because of the impact on the public purse.

Having made these observations, some recommendations are in order.

It would be important to have focused social policies and some flexibility in the system, to allow correcting distortions that might appear over the years without the need for constitutional changes.

It will also be necessary to advance on labour law reform, to reduce the cost and risk of hiring workers, thus boosting the employability of everyone.

The political cost of a social security reform is high. The proposal suggests lawmakers are moving in the right direction. But the country cannot miss this window of opportunity. 

Americas Policy & Government Brazil

Zeina Latif is chief economist at XP Investments. She holds master and doctorate degrees in Economics at University of Sao Paulo (USP).

Previously she worked at Royal Bank of Scotland as senior economist for Latin America, and ING, ABN Amro and HSBC Asset as chief economist for Brazil.

She is columnist at the newspaper Estado de São Paulo and she is counselor at the Social and Economic Development Council of the Republic Presidency.

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