The Case for Pension Reform in Brazil: An Unequal and Exhausted Retirement System on the Verge of Collapse
Brazilian society is confronting a demographic transition which will have ramifications for generations. By 2050, projected life expectancy will have surpassed 80 years, the ratio of elderly to working-age populations will double, and the number of elderly people will triple. This shift, which reflects improvements in health outcomes, means that fewer workers will be supporting more retirees. Coupled with the past several years of limited or negative growth and the generous pensions given to public employees, Brazil is fast approaching a point when it will no longer be able to meet its pension obligations (currently estimated to be in 2021). Congress has unsuccessfully attempted to pass legislation to adjust the thirty-year old pension system. Meanwhile, the accumulating debt—billions of reais—has placed a financial strain on government accounts, creating a fiscal bomb waiting to explode.
In Brazil, only a constitutional amendment can modify pension laws because the right to retirement benefits is engraved in the 1988 Constitution. The system, devised during the transitional period from dictatorship to democracy, functions as a pay-as-you-go model: the current working population pays a tax which is transferred to recipients as pension payments. If expenditures were equal to or less than revenues from this tax, then the accounts would be balanced. In 2017, however, the government accumulated a deficit of more than R$200 billion (US$61.3 billion) in order to meet its pension obligations. Despite this imbalance, reform is politically difficult and requires much deliberation. Three-fifths of Congress must vote in favor in order to accept a constitutional amendment.
The Economics of Demography
Demographic changes over the past thirty years have made the Brazilian pension system financially insolvent. The biggest problem Brazil faces is its aging population, which results in a declining pool of workers contributing to the increasing demand in resources. In 1988, there were six elders (individuals over the age of 65) for every 100 working-age individuals. By 2015, that number had nearly doubled: almost 12 elders for every 100 working-age individuals. The Organization for Economic-Cooperation and Development projects the number of elderly will triple in Brazil by 2050. Amplifying this issues is the low fertility rate, which dropped from 3.1 in 1988 to 1.75 in 2014. The current rate is still well below 2.1, which is considered the population replacement rate.
Another demographic trend adversely affecting the solvency of the pension system is increased life expectancy. As a result of technological advancements in the medical field and improvements in health services, Brazilians are now able to live longer, an accomplishment worth celebrating. At the same time, this shift places a heavier burden on the current pension model. On average, Brazilians retire at age 58; however, life expectancy has increased from 64 years in 1988 to 75 years in 2017. Therefore, on average, retirees now require pension payments from the government for nearly two decades, instead of six years.
An Unequal Burden
These financial problems are further intensified by the generous benefits given to individuals in the public sector. The Brazilian pension system has two different regimes: one for private sector employees and one for former public sector employees. In 2016, although only 3.2 percent of all pension recipients were former public sector employees, they accounted for 34 percent of the total deficit. On average, approximately one million public sector pensioners received R$8,695 per month while 30 million private sector pensioners received R$1,339 per month, a significant disparity. Furthermore, this system disproportionately benefits the Brazilian elite and upper-middle classes, as recipients of public sector pension funds include former politicians, military, and government personnel. A study conducted by the Brazilian Institute of Public Opinion and Statistics (IBOPE) showed that 63 percent of respondents agree that public and private sector employees should be regulated by the same laws.
Political and Economic Consequences
Congress has correctly identified the pension system as an area that requires immediate attention, but the lack of credible leadership to pass and implement reforms makes change highly improbable. Moreover, drastic adjustments by an unpopular government could have adverse political and social effects. A recent study by Ideia Big Data and Locomotiva found that 96 percent of Brazilians feel unrepresented by current politicians in Congress. In an already polarized society, if an unpopular bill is signed into law, legislators’ chances of reelection in October could further be jeopardized.
Yet the economic implications of inaction could be even more widespread. The deficit is hurting every aspect of the economy: both Fitch and Standard & Poor’s downgraded Brazil’s credit rating earlier this year, a decision attributed to the inability to pass pension reform and one that makes Brazilian debt more expensive to service, further limiting the government’s finite financial resources. If the proposed bill had been approved, it would have saved an estimated R$800 billion (US$245 billion) over the next ten years. The current model, on the other hand, could prove unable to sustain the growing elderly population—many of whom belong to the working and middle classes and rely on their pensions for daily expenses—further straining a vulnerable sector of Brazilian society.
What’s Next For the Pension System in Brazil?
The changing structural composition of the population is a natural phenomenon that cannot be altered quickly with either macroeconomic policies or a new constitutional amendment. Combined with the generous benefits given to an already privileged few, this ongoing demographic shift demands policy reforms if the government is to continue to meet its obligations. Urgent public policy changes are needed, but many are highly unpopular, especially given the widespread disapproval of the political establishment.
Public opinion on pension reform has evolved over the past year. In April of 2017, Datafolha found that 71 percent of respondents rejected pension reform. Nine months later, in January 2018, a new poll commissioned by the government and conducted by IBOPE found that only 44 percent of the population rejected pension reform. The change demonstrates a growing awareness of the problems caused by the current system, but acceptance of the recent legislation proposed by President Michel Temer and Speaker of the House Rodrigo Maia remains low: 57 percent of the population does not agree with the proposed bill.
The lower house of Congress has repeatedly postponed a vote due to a lack of support. As of May 2018, there is no prospect of passing such legislation. Maia pushed for a vote in late February, but due to the federal military intervention in Rio de Janeiro until the end of the year, it is extremely unlikely, since constitutional amendments are not allowed during a period of federal intervention. President Temer raised the possibility of putting pension reform to a vote in November or December, after the upcoming elections but before the inauguration of a new president and a new Congress, but such an action is far from guaranteed and current candidates for the presidency—well aware of the issue’s complexity and unpopularity—have been reluctant to address pension reform. However, reform is inevitable given Brazil’s fiscal situation. The current inaction simply pushes the problem dangerously down the road, making pension reform the most urgent challenge that the newly elected Congress will face in 2019, although the outcome of the voters’ will in October will shape the scope and nature of the eventual reform measure.
About the Author
The Brazil Institute—the only country-specific policy institution focused on Brazil in Washington—works to foster understanding of Brazil’s complex reality and to support more consequential relations between Brazilian and U.S. institutions in all sectors. Read more