Pension reform: Order, progress and work longer

Brasil - Mar 13 2019
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Pension reform: Order, progress and work longer

On the last 20th February. President Jair Bolsonaro presented a Pension reform proposal to the Brazilian Congress to be reviewed by the two Houses this year, by the end of May in an optimistic scenario.

The new pension reform includes an increase of the minimum retirement age from 55 for men and women to 65 for men and to 62 for women. The new law would also increase the contributions’ duration to a minimum of 20 years. The pension reform would be gradually implemented and is based on a capitalization system that would allow contributors to accumulate private savings for their retirement.

In the words of the Ministry of Economy, Mr. Guedes, the pension reform is a “moral responsibility with future generations” since the current regime is not sustainable anymore. According to the government, the three important aspects to take into account are: (i) demographic change, (ii) informal labor and (iii) unequal current pension system.

Brazil’s population is aging and the dependency ratio (i.e., the percentage of 65 years & older population over working age population) is increasing. Life expectancy at birth (from 65 years in 1990 to 75 years in 2016, World Bank data) has rapidly augmented without enough time to adjust the pension system to such an aging population. Furthermore, the life expectancy of a person at the effective time of retirement (today roughly 60 years of age) has also increased by 23 years. Some estimations show that in 20 years, the number of contributors will be the same as the number of pensions beneficiaries. Beyond that, if there is no change in the retirement age, by 2065 there will be two beneficiaries per contributor; the current system would collapse.

Underground economy is also rising. New jobs creation since the economic recession of 2015-2016 is mostly in the informal sector. For instance, in 2017 the 1.8 million jobs created belonged to the informal sector. The increasing informal sector represents a revenue constraint that would worsen the pension deficit, estimated at 4.1% of the GDP in 2016.

Source: Ministry of Planning, Government of Brazil.

The current pension reform proposal also aims to tackle the different treatment between private and public retired employees within the current system. The present regime allows public officers to retire early, triggering a high fiscal pressure. In 2016, the former public sector employees represented 3.2% of all pension regime beneficiaries and accounted for 34% of the total pension deficit.

The increased expenses in the current pension regime worsen the country’s debt situation, which has substantially degraded after 2015 because of reducing revenues. However, it is not an easy reform to pass for the Congress as it needs three-fifths of the votes to be approved and Mr. Bolsonaro’s PSL party is not certain to gather the required majority. The political implications cannot be neglected as social protests could arise, and the government must be prepared to confront similar situations to those occurred in 2017, when former President Michel Temer proposed without success a pension reform under his government.

Mr. Guedes anticipates that the new pension regime will allow savings of 265 billion dollars over the next ten years, which could have a positive impact on diminishing the fiscal deficit. According to the IMF, the public debt accounts for 84% of the GDP in 2017 and if nothing changes it could reach 95.6% in 2023.

Gabriela Aguilera-Lizarazu, Analyst
Sources: IMF, World Bank, Ministry of Planning of Brazil.

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