Brazil’s long-awaited pension reform proposal, explained

. Feb 20, 2019
pension system reform brazil Nazi

On Wednesday, the Jair Bolsonaro administration submitted its pension reform proposal to Congress. The bill is the single most awaited piece of legislation from this government. We at The Brazilian Report have broken the project down. Mr. Bolsonaro’s economic team, led by the ultra-liberal Economy Minister Paulo Guedes, is hoping to balance the social security deficit and, therefore, give some stability to Brazil’s public accounts.

According to the Ministry of Economy, if approved, the pension reform could save up to BRL 1.16 trillion over ten years—if Congress doesn’t neuter the bill, of course. But even if Mr. Guedes’ projections are right—and that’s a big if—the social security deficit is estimated at BRL 3.1 trillion for the next decade.

</span></p> <p><span style="font-weight: 400;">After an initial positive reaction from investors to Jair Bolsonaro&#8217;s reform, the São Paulo stock exchange dropped by over 1,000 base points. Market operators believe it will be tough to pass the reform in Congress, due to its tougher rules on civil servants and the government&#8217;s political ineptitude.</span></p> <p><span style="font-weight: 400;">Civil servants and wealthier workers retire earlier—and are entitled to heftier benefits. With them, Mr. Guedes&#8217; pension reform proposal was but harsher than the one presented by former President Michel Temer. And even that version was struck down by organized lobbies.</span></p> <hr /> <p><img loading="lazy" class="alignnone size-large wp-image-14234" src="" alt="pension system reform brazil stock market" width="1024" height="683" srcset=" 1024w, 300w, 768w, 610w, 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></p> <hr /> <h2>Minimum retirement age</h2> <p><span style="font-weight: 400;">The transition for male workers in the private sector will affect those aged 61 or more. According to the bill, the minimum age of retirement will go up by six months every year, until reaching 65. For women, the transition period affects those between 56 and 62 years old. The same age limits are to be established for public servants.</span></p> <p><span style="font-weight: 400;">If the bill gets approved in 2019, the transition period would run until 2031.</span></p> <p><b>How does it work today:</b><span style="font-weight: 400;"> Men and women may retire at 65 and 60 years old, respectively, providing they have contributed to their pensions for at least 15 years. Brazilians may also retire, regardless of age, if they have contributed for at least 30 years (women) or 35 (men). These pensions, however, are reduced by the so-called &#8220;welfare factor,&#8221; which takes into account length of service, the pensioner&#8217;s age, and life expectancy. Just over half of Brazilian workers (53 percent) retire after reaching the age threshold.</span></p> <hr /> <p><img loading="lazy" class="size-large wp-image-14235 aligncenter" src="" alt="pension system reform brazil life expectancy" width="654" height="1024" srcset=" 654w, 191w, 768w, 610w, 1200w" sizes="(max-width: 654px) 100vw, 654px" /></p> <hr /> <h2>Minimum length of service</h2> <p><span style="font-weight: 400;">The bill increases this lower limit from 15 to 20 years of social security contributions. </span></p> <p><b>Pension amount calculation</b></p> <p><span style="font-weight: 400;">Pension value will be based on an average of the worker&#8217;s social security contribution. After paying for 20 years, the person may receive 60 percent of that value. Then, two percent will be added each year; to obtain the full benefit, workers must have contributed for 40 years.</span></p> <p><b>How does it work today: </b><span style="font-weight: 400;">The pension value is based on 80 percent of the largest amount paid.  </span></p> <h2>Contribution percentage</h2> <p><span style="font-weight: 400;">The percentage of contribution will be unified for private and public sector workers. There will be a progressive system, with higher contributions for bigger salaries. The rate starts at 7.5 percent for those who earn up to one minimum wage, and goes up to 16.8 percent for salaries over BRL 39,000. </span></p> <p><b>How does it work today: </b><span style="font-weight: 400;">Private sector workers pay up to 11 percent of their salaries and government employees pay 11 percent of the maximum contribution allowed by the system or on their salary, depending on when they joined the system. </span></p> <h2>Transition rules</h2> <p><span style="font-weight: 400;">There will be three transitional options for workers from the private sector that are currently contributing to social security, and one path for public workers.  </span></p> <p><span style="font-weight: 400;">Workers eligible for retirement due to length of service within two years of the bill&#8217;s approval may choose to retire, but will have to pay a 50 percent “toll” on the remaining contribution time. This means that if they need to contribute for one more year in the current rules, another six months will be added. Their benefits will also be reduced by the welfare factor.</span></p> <p><span style="font-weight: 400;">They may also choose to follow the &#8220;points&#8221; method&#8221;: where workers can retire once the sum of their age and length of service reaches a certain cut-off point. However, the limit is 96 years old for men and 86 years old for women, growing one point each year until it reaches 105/100 by around 2033. </span></p> <p><span style="font-weight: 400;">Another option is to consider the minimum age required for that year and have reached the minimum length of service: 35 years for men and 30 for women. </span></p> <p><span style="font-weight: 400;">Public sector workers may also adopt the points formula, with a minimum length of service of 35 years for men and 30 for women, and minimum ages of 61 years for men and 56 for women. They also must have worked in the public sector for at least 20 years and have held their current posts for 5 years. </span></p> <h2>Capitalization</h2> <p><span style="font-weight: 400;">The bill introduces the capitalization system, in which each worker contributes to an individual account. The worker may choose the institution that will manage his account, which may be either public or private, and workers will be able to transfer accounts. The rules of this system will be determined by a different bill, yet to be presented. </span></p> <p><b>How does it work today: </b><span style="font-weight: 400;">There is no capitalization system. Pensions of retired workers are paid for by current contributors. </span></p> <h2>Pension by death</h2> <p><span style="font-weight: 400;">Retired individuals who receive aid after a relative’s death will obtain 60 percent of the full amount, plus 10 percent for each dependent. </span></p> <p><b>How does it work today: </b><span style="font-weight: 400;">The benefits are paid in full, up to the maximum value supported by the system.</span></p> <h2>Benefits accumulation</h2> <p><span style="font-weight: 400;">It will no longer be possible to receive two or more full benefits. Pensioners will receive the largest benefit in full and a percentage of their additional benefits. The rate starts at 80 percent for benefits of up to one minimum wage until 20 percent of those ranging from three to four minimum wages.  </span></p> <p><b>How does it work today: </b><span style="font-weight: 400;">People may receive more than one full pension. </span></p> <h2>Social benefits</h2> <p><span style="font-weight: 400;">Low-income disabled and elderly individuals who did not contribute will receive BRL 400 by the age of 60. The benefit will reach the value of the minimum wage by the time they turn 70 years old.</span></p> <p><b>How does it work today: </b><span style="font-weight: 400;">Men and women receive a minimum wage pension when they turn 65. </span></p> <h2>Law enforcement</h2> <p><span style="font-weight: 400;">Civil and federal officers and prison officers of both sexes may retire by the age of 55. Men must have contributed for 30 years and women for 25. The minimum length of service starts at 20 years for men and 15 for women, going up to 25/20. </span><b> </b></p> <p><b>How does it work today: </b><span style="font-weight: 400;">There is no minimum retirement age and prison officers are not included on this special regime. </span><b> </b></p> <h2>Politicians</h2> <p><span style="font-weight: 400;">The minimum retirement age will also be 65 years for men and 62 for women, and they will have a “toll” of 30 percent of the remaining contribution period. Newly-elected members will enter automatically on the general regime. </span></p> <p><b>How does it work today:</b><span style="font-weight: 400;"> The minimum age is 60 years old for men and women, coupled with 35 years length of service. Lawmakers receive 1/35 of their salary for each year in service.  </span></p> <h2>Military</h2> <p><span style="font-weight: 400;">Military police officers and firefighters will go under the same regime as the Military. Retired military members may work on other activities. </span></p> <p><b>How does it work today: </b><span style="font-weight: 400;">Military police officers and firefighters follow the rules in each state and there is no minimum retirement age.</span></p> <p><b>Learn more: </b><span style="font-weight: 400;"><a href="">(full government presentation in Portuguese)</a></span>

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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